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THE 

SCOPE AND METHOD 

OF 

POLITICAL ECONOMY 



THE 

SCOPE AND METHOD 

OF 

POLITICAL ECONOMY 



BY 



JOHN NEVILLE KEYNES, M.A., D.Sc, 

UNIVERSITY LECTDKEK IN MORAL SCIENCE AND FOEMEBLY FELLOW OF 
PEMBROKE COLLEGE IN THE UNIVERSITY OF CAMBRIDGE 



THIRD EDITION, REVISED 



Hontron 
MACMILLAN AND CO., Limited 

NEW YOEK : THE MACMILLAN COMPANY 
1904 

[The Right of Translation and Reproduction is reserved] 



H ft -f I 



First Edition, 1890. 
Second Edition, 1897. 
Third Edition, 1904. 



\.%\^l 









PREFACE TO THE FIRST EDITION. 



^ 



rilHE nature of the topics discussed in the following 
pages is sufficiently indicated in the introductory 
chapter, and a lengthy preface is therefore unnecessary. 
The abstract discussion of methods may appear to some 
to have mainly an academic interest, since it does not 
directly extend our knowledge of economic phenomena. 
Whilst, however, we ought to be upon our guard 
against allowing any such discussion to obscure the 
greater importance of actual economic investigations, 
the subject is one to which all students of economics 
must necessarily give some attention in the course of 
their reading, and its indirect bearing on the solution 
of practical economic questions is very far indeed 
from being without importance. Unfortunately almost 
every problem connected with the scope and method of 
political economy has given rise to conflict of opinion ; 
and the resulting controversies have sometimes been 



VI PREFACE. 

very bitter. Those readers, therefore, who already- 
have any acquaintance with the literature of economic 
method, will be prepared to find that several of the 
chapters are more or less controversial in character. 
At the same time, I have endeavoured to avoid the 
tone of a partisan, and have sought, in the treatment 
of disputed questions, to represent both sides without 
prejudice. Whilst making no attempt to bring about a 
complete reconciliation between opposing views, I have 
been able to shew that the nature of the opposition 
between them has sometimes been misunderstood, and 
its extent consequently exaggerated. 

Since the scope and method of a science can never 
be satisfactorily discussed at the commencement of 
its study, some knowledge of political economy in its 
general outlines is presupposed. As far as possible, 
however, illustrations of a fairly simple and familiar 
kind have been chosen. A good many illustrations 
that were included in the first draft of the book have 
been omitted, partly because they would have occupied 
too much space if given with any completeness, and 
partly in order to avoid points of controversy not 
essentially connected with the subject immediately 
under discussion. A certain amount of repetition has 
resulted from the frequent necessity of treating the 
same problem from more than one point of view, and 
from the fact that the different questions to which the 



PREFACE. VH 

consideration of economic method gives rise are in so 
many ways connected one with another. I have not 
hesitated to repeat the same thing several times in 
different connexions, if clearness seemed to be gained 
thereby. 

By means of quotations and references I have 
endeavoured to make clear my indebtedness to other 
writers ; and it is, therefore, for the most part un- 
necessary to specify here the various sources from 
which I have derived assistance. To the works both 
of Professor Marshall and Professor Sidgwick, however, 
I am indebted in ways that it is impossible to identify 
and separately indicate. I am further under obligation 
to Professor Marshall, and also to Mrs Marshall, Mr 
W. E. Johnson, and Professor Nicholson, for their 
great kindness in reading the proof-sheets of the book 
while it has been passing through the press. Their 
criticisms and suggestions have been most valuable, 
and have enabled me in many ways to improve my 
treatment of the subject. 

J. N. KEYNES. 



6, Harvey Road, Cambeidge, 
12 Deceviber 1890. 



CONTENTS. 

CHAPTER I. 

Introductory. 

PAGE 

§ 1. Nature and importance of the enquiry into the scope 

and method of political economy .... 1 
§ 2. The conception of political econojny as a positive, 

abstract, and deductive science .... 9 
§ 3. The conception of political economy as an ethical, 

realistic, and inductive science .... 20 
§ 4. The method of political economy cannot adequately 

be described by any single phrase . . .29 

CHAPTER II. 

On the Relation of Political Economy to 
Morality and Practice. 

§ 1. Distinction between economic uniformities, economic 

ideals, and economic precepts . . . .31 

§ 2. The possibility of studying economic laws or uni- 
formities without passing ethical judgments or 
formulating economic precepts .... 37 



CONTENTS. 



PAGE 



§ 3. Grounds for recognising a distinct positive science 
of political economy, the sole province of which 
is to establish economic uniformities ... 46 

u^"^. Applied economics 55 

§ 5, Political economy and ethics 60 

§ 6. Methodological importance of the distinctions indi- 
cated in this chapter 63 

NOTES TO CHAPTER II. 

A. On Political Economy and Laisser Faire . . 67 

B. On the Scope of Political Economy considered 

AS AN Art 74 



CHAPTER III. 

On the Character and Definition of Political 
Economy regarded as a Positive Science. 

1. Political economy and physical science ... 84 

2. Political economy and psychology .... 87 

3. Political economy a social as distinguished from a 

political science 92 

4. Definitions of Wealth and Economic Activity . 93 

5. Definition of Political Economy .... 100 

NOTE TO CHAPTER III. 
On the Interdependence of Economic Phenomena . 102 



CONTENTS. 



CHAPTER IV. 

On the Relation op Political Economy to 
General Sociology. 

PAGE 

§ 1. Conflicting views of the relation between economic 

science and the general science of society . 112 
§ 2. The place of abstraction in economic reasoning . 115 
§ 3. Examples of economic problems requiring for their 

complete solution a realistic treatment . . 129 

§ 4. Distinction between political economy and other 

social enquiries . . . . . . .135 



NOTES TO CHAPTER IV. 

A. On the Distinction between Abstract and 

Concrete Political Economy . . .142 

B. On the Distinction between the Statics and 

THE Dynamics op Political Economy . . 145 

C. On Political Economy and Common Sense . 149 



CHAPTER V. 

On Definition in Political Economy. 

§ 1. The problem of definition in political economy . 153 
§ 2. Conditions to be satisfied in framing economic 

definitions . . . . . . . .159 

§ 3. Relativity of economic definitions .... 166 



XU CONTENTS. 



CHAPTER VI. 



On the Mf]THOD OF Specific Experience in 
Political Economy. 



PAGE 



§ 1. Preliminary functions of observation in economic 

enquiries . . . . . . . .172 

§ 2. Limited scope for experiment in political economy . 178 

§ 3. The employment of the method of diflFerence in- 
dependently of deliberate experiment . . 188 

§ 4. The method of inductive generalization from a 

multiplication of instances. .... 202 

§ 5. Limitations of the empirical method . . . 209 

CHAPTER VII. 

On the Deductive Method in Political Economy. 

§ 1. Nature of the dedvictive method .... 216 
§ 2. The ajsplication of the term "hypothetical" to 

economic science . ' . . . . .217 

§ 3. Functions of observation in the employment of the 

deductive method 227 

§ 4. Ricardo's use of the deductive method . . . 236 

§ 5. The premisses of deductive political economy . 240 

§ 6. Special modifications of the deductive method . 244 

CHAPTER VIII. 

On Symbolical and Diagrammatic Methods in 
Political Economy. 

§ 1. Mathematical character of political economy . 252 

§ 2. The employment of arithmetical examples . . 254 



THE SCOPE AND METHOD OF 
POLITICAL ECONOMY. 



CHAPTER L 

INTRODUCTORY. 

§ 1. Nature and importance of the enquiry into the 
scope and method of political economy. — In the terms 
economy and economic there is an ambiguity that 
underlies much of the current confusion as to the 
nature of political economy. Any line of action is 
commonly termed economic when it attains its end with 
the least possible expenditure of money, time, and 
effort; and by economy is meant the employment of 
our resources with prudence and discretion, so that we 
may derive from them the maximum net return of 
utility. 

But the words are also used in a sense not implying 
any specially reasonable adaptation of means to ends ; 

K. I 



2 INTRODUCTORY. [CHAP. 

and in works on political economy the term economic is 
generally employed simply as an adjective correspond- 
ing to the substantive wealth. By an economic fact, 
1 accordingly, is understood any fact relating to the 
phenomena of wealth. By economic activities are 
meant those human activities that direct themselves 
towards the creation, appropriation, and accumulation 
of wealth ; and by economic customs and institutions, 
the customs and institutions of human society in re- 
gard to wealth. 

Political economy or economics is a body of doctrine 
relating to economic phenomena in the above sense ; 
and the purpose of the following pages is to discuss the 
character and scope of this doctrine, and the logical 
method appropriate to its development. In seeking to 
define the scope of any department of study, the object 
in view is primarily to determine the distinguish- 
ing features of the phenomena with which it deals, 
and the kind of knowledge that it seeks concerning 
these phenomena. The enquiry also involves an ex- 
amination of the relations between the study in 
question and cognate branches of study. In passing 
to the consideration of method, we are dealing with 
a branch of applied logic, the object being to deter- 
mine the nature of the logical processes specially 
appropriate to the study — that is, the methods of 
investigation and proof of which it can avail itself — 



I.] LOGIC OF POLITICAL ECONOMY. 3 

and the logical character of its conclusions as affected 
thereby. 

The discussion that follows belongs, then, to what 
may be called the philosophy or logic of political 
economy, and does not directly advance our knowledge 
of economic phenomena themselves. For this reason, 
a certain impatience is sometimes felt when any such 
discussion is proposed. What we want, it is said, is 
not any more talk about method, but rather useful 
applications of the right method ; let us increase our 
actual stock of economic truths, instead of indulging 
in barren disputes about the way in which economic 
truths are to be attained. To this objection the logi- 
cian might reply that the enquiry has at any rate 
a logical, even if it has not an economic, significance. 
But it has also an economic significance. A moment's 
consideration will shew that, from the point of view of 
political economy itself, it is of material importance 
that its scope and method should be rightly under- 
stood. 

There is, to begin with, a widely current confusion 
as to the nature of economic laws ; and for this reason 
amongst others, it is imperative that the economist 
should seek to define as accurately as possible the 
nature and limits of his sphere of enquiry. There 
should be no vagueness on the question whether 
political economy is concerned with the actual or the 

1—2 



4 INTRODUCTORY. [CHAP. 

ideal, whether it treats merely of what is, or asks 
further what ought to be, laying down rules for the 
attainment of those ends that it pronounces desirable. 
Even if theoretical and practical enquiries are both 
to be included within its scope, still the distinction be- 
tween the two, and their mutual relations, need to be 
clearly and unambiguously set forth. Misunderstanding 
on these points has led to a misunderstanding of econo- 
mic truths themselves, and has consequently impaired 
the influence and authority of economic science. 

Next as to method, it is said that instead of arguing 
about what method of investigation is the right one, 
it is better to exemplify the right method by employ- 
ing it in the actual attainment of new economic truths. 
But are we then to beg the question of its rightness ? 
In the long run, time cannot but be saved by making 
a preliminary study of the instruments of investigation 
to be used, the proper way of using them, arid the 
kind of results that they are capable of yielding. 
For in so far as methods of reasoning are employed 
without due regard to the conditions of their validity, 
the results gained must likewise be of uncertain va- 
lidity, and the progress of economic knowledge, instead 
of being advanced, will be retarded. 

The process, moreover, whereby a conclusion is 
reached affects its character and value, and the quali- 
fications and limitations subject to which it is to be 



I.] LOGIC OF POLITICAL ECONOMY. 5 

acce]3ted. If it is purelj^ empirical, then it will be 
established only with a more or less high degree of 
probability, and it cannot be extended far beyond 
the range of space or time over which the instances 
on which it is based were collected. If, on the other 
hand, it is obtained deductively, then it is hypo- 
thetical until it has been determined how far, and 
under what conditions, the assumptions on which 
it rests are realised in fact. It has been plausibly 
argued that Ricardo's chief weakness was that he 
did not clearly appreciate the true nature of his 
own method. At any rate he did not, in interpret- 
ing his results, take the precautions necessary to 
provide against misconception on the part of many 
of his readers. 

It is true that it is one thing to establish the 
right method for building up a science, and quite 
another thing to succeed in building it up. It is 
also true, as the Austrian economist Menger has 
remarked, that sciences have been created and re- 
volutionized by those who have not stopped to 
analyse their own method of enquiry. Still their 
success must be attributed to their having employed 
the right method, even if they have employed it 
unconsciously or without going out of their way to 
characterize it. Their method must, moreover, be 
\ subjected to careful analysis before the value of 



6 INTRODUCTORY. [cHAP. 

their contributions to the science can be properly 
estimated. 

Economics is not in any way peculiar in re- 
quiring that its method should be discussed. The 
logic of other sciences is, however, for the most part 
sufficiently dealt with in general works on logic or 
methodology. There are special reasons, partly to be 
found in the nature of the subject itself, and partly 
due to extrinsic causes, why the logic of political 
economy needs a more detailed consideration. 

In the first jilace, economic science deals with 
phenomena that are more complex and less uniform 
than those with which the natural sciences are con- 
cerned ; and its conclusions, except in their most 
abstract form, lack both the certainty and the uni- 
versality that pertain to physical laws. ' There is a cor- 
responding difficult}^ in regard to the proper method 
of economic study ; and the problem of defining the 
conditions and limits of the validity of economic 
reasonings becomes one of exceptional complexity. It 
is, moreover, impossible to establish the right of any 
one method to hold the field to the exclusion of others. 
Different methods are appropriate, according to the 
materials available, the stage of investigation reached, 
aud the object in view ; and hence arises the special 
task of assigning to each its legitimate place and 
relative importance. 



I.] LOGIC OF POLITICAL ECONOMY. 7 

Another reason for discussing the true principJes 
of economic method in some detail is that fallacious 

' reasonings are more common in political economy 
than in most other studies. This is due only in 
part to the difficulty and complexity of the subject- 
matter with which the science is concerned. It 
deals with phenomena which, while encompassed with 
difficulties, are matters of everyj^day observation ; and 
it has few technical terms that are not also terras of 
e very-day discourse. A not unnatural consequence is 

j that people think themselves competent to reason 
about economic problems, however complex, without 

[ any such preparatory scientific training as would be 
universally considered essential in other departments 
of enquiry. This temptation to discuss economic 
questions without adequate scientific preparation is 
all the greater, because economic conditions exert so 
powerful an influence upon men's material interests. 
"Few men," says General Walker, "are presumptuous 
enough to dispute with the chemist or mechanician 
upon points connected with the studies and labours of 

I his life ; but almost any man who can read and write 

' feels himself at liberty to form and maintain opinions 
of his own upon trade and money. The economic 
literature of every succeeding year embraces works 
conceived in the true scientific spirit, and works ex- 
hibiting the most vulgar ignorance of economic history, 



8 INTRODUCTORY. [CHAP. 

and the most flagrant contempt for the conditions of 
economic investigation. It is much as if astrology 
were being pursued side by side with astronomy, 
or alchemy with chemistry." Broadly speaking, the 
general tendency of popular economics is towards rash j 
generalizations and fallacious arguments post hoc ergo 
jjvopter hoc. This is frequently combined with an 
imperfect analysis of fundamental conceptions, leading 
to confusion of thought and the selection of false 
propositions as self-evident postulates ; and where 
deductive reasoning is employed, its results are often 
applied without regard to the conditions requisite for 
their valid application. 

To this it must be added that the sharp distinctions 
drawn by opposing schools, and their narrow dogmatism, 
have unnecessarily complicated the whole problem. The 
subject has become involved in heated controversies, 
that have not only made it wearisome to unprejudiced 
persons, but have also done injury to the credit of 
political economy itself. Outsiders are naturally 
suspicious of a science, in the treatment of which 
a new departure is so often and so loudly proclaimed 
essential. So far, it may be inferred, from economists 
having made progress in their science, they cannot 
even agree how to set about their work. 

The besetting fallacy of writers on economic method 
has been justly said to be the fallacy of exclusiveness. 



I.] FALLACY OF EXCLUSIVENESS. 9 

A single aspect or department of economic study is 
alone kept in view, and the method appropriate thereto 
aggrandized, while other methods, of equal importance 
in their proper place, are neglected or even explicitly 
rejected. Hence the disputants on both sides, while 
right positively, are wrong negatively. Their criticisms 
on rejected methods are, moreover, too often based on 
misapprehension or misrepresentation. Methods are 
attacked for not doing what those who advocate their use 
have never imagined they could do; and the qualifica- 
tions and limitations, with which each side expounds its 
own method, are overlooked by the other side. Thus 
combined with the fallacy of exclusiveness, or rather 
in consequence of it, there is in these controversies 
a remarkable prevalence of ignoratio elenchi. In the 
following pages an attempt will be made to do 
justice to all the different instruments of investigation 
of which the economist can avail himself, while 
attention will also be drawn to the limitations to 
which each in turn is subject. 

§ 2. The conception of political economy as a 
positive, abstract, and deductive science. — The main 
points involved in controversies about economic method 
may be indicated in outline by briefly contrasting 
two broadly distinguished schools, one of which de- 
scribes political economy as positive, abstract, and 
deductive, while the other describes it as ethical. 



10 INTRODUCTORY. [CHAP. 

\ realistic, and inductive. It should be distinctly un- 
derstood that this sharp contrast is not to be found 
in the actual economic writings of the best economists 
of either school. In the methods that they employ — 
when they are really discussing the same problems — 
there is to a great extent substantial agreement. 
They differ, however, in the relative importance that 
they attach to different aspects of their work ; and 
in their formal statements about method these differ- 
ences become exaggerated. 

The question of the right method of economic 
enquiry was not as such discussed by Adam Smith ; 
and his views on the subject have, therefore, to be 
gathered from his way of dealing with actual economic 
problems. As a matter of fact, the support of his 
authority has been claimed on behalf of both the schools 
above referred to. It has been said of him that he first 
raised political economy to the dignity of a deductive 
science. But he has also been regarded as the founder 
of the historical method in political economy. 

The reason for this apparent contradiction is not far 
to seek. It is to be found in Adam Smith's freedom 
from excess on the side either of a priori or of a 
poster^iori reasoning. He rejected no method of enquiry 
that could in any way assist him in investigating the 
phenomena of wealth. For argument or illustration 
he had recourse, as the occasion might arise, either 



I.] ADAM SMITH, MALTHUS, AND RICARDO. 11 

to elementary facts of human nature, or to complex 
facts of industrial life. He believed in a " natural " 
order of events, which might be deduced d priori from 
general considerations; but he constantly checked his 
results by appeals to the actual course of history. He 
worked up from abstractions to the complex realities 
of the economic world in which he lived. Thus, if 
on deductive grounds he lays down a doctrine of the 
tendency of wages to equality, he combines it with an 
inductive enquiry into the causes that check or restrict 
the operation of this tendency. If he sets forth the 
" natural " progress of opulence, he enters also upon an 
historical investigation of what the actual progress of 
opulence has been. If he condemns the doctrine of 
protection to native industry mainly on abstract 
grounds, he enforces his views with concrete illustra- 
tions and arguments in the greatest variety. 

As regards the inductive tendencies noticeable in 
Adam Smith, his successor is to be found in Malthus ; 
for the continuation and development of the abstract 
deductive tendencies we turn to .Ricardo. Subsequent 
economists of the English school assimilated what was 
most characteristic in both these writers; but it was 
Ricardo, rather than Malthus, who gave to their work 
a distinctive tone, particularly in their specific analysis 
of the method to be pursued. 

Senior and J. S. Mill were the earliest English 



12 , INTRODUCTORY. [CHAP. 

economists who definitely formulated principles of 
economic method. Senior's views are contained in his 
introductory lectures before the University of Oxford, 
and in his treatise on Political Economy ; Mill's 
views are to be found in his Essays on some Unsettled 
Questions of Political Ecuiiomy, and in the sixth book 
of his Logic. The problem is discussed in more detail 
by Cairnes in his diameter and Logical Method of 
Political Economy, a work of admirable lucidity, which 
has long been considered the authoritative text-book of 
English political economy, so far as concerns its logic. 
Bagehot's essays on the postulates of English political 
economy and on the preliminaries of political economy, 
published in his Economic Studies, have also in some 
respects a representative character. 

There are minor differences in the principles laid 
down by these four writers respectively, but funda- 
mentally they are in agreement in regarding political 
economy as a science that is in its scope positive as 
distinguished from ethical or practical, and in its 
method abstract and deductive. The following is a 
very brief summary of their characteristic doctrines. 

In the first place, a sharp line of distinction is 
drawn between political economy itself and its appli- 
cations to practice. The function of political economy 
is to investigate facts and discover truths about 
them, not to prescribe rules of life. Economic laws 



I.] DOCTRINES OF MILL AND CAIRNES. 13 

are theorems of fact, not practical precepts... Political 
economy is, in other words, a sci ence, not an art or a 
department of ethical enquiry. It is described as 
standing neutral between competing social schemes. 
It furnishes information as to the probable con- 
sequences of given lines of action, but does not itself 
pass moral judgments, or pronounce what ought or 
what ought not to be. At the same time, the greatest 
value is attached to the practical applications of 
economic science ; and it is agreed that the economist 
ought himself to turn his attention to them — not, 
however, in his character as a pure economist, but 
rather as a social philosopher, who, because he is an 
economist, is in possession of the necessary theoretical 
knowledge. It is held that if this distinction is drawn, 
the social and ethical aspects of practical problems — 
which may be of vital importance — are less likely to 
be overlooked or subordinated, k 

As to its position amongst the sciences, political 
economy is not regarded as inseparably bound up with 
social philosophy in general. Economic facts are, it is 
allowed, influenced by social facts of very various kinds, 
and in their turn influence them ; but it is neverthe- 
less held to be possible up to a certain point to isolate 
the study of the phenomena of wealth from the study 
of other phenomena of society. Such isolation is, 
indeed, said ^ ^ be necessitated by the requirements of 



14 INTRODUCTORY. [CHAP. 

science, which always proceeds by analysing concrete 
phenomena, so as to deal separately Avith their differ- 
ent aspects and the different elements of which they 
are composed. Economic science constitutes, therefore, 
a distinct, though not entirely independent, depart- 
ment of sociological speculation. 

Passing to the means whereby the truths of the 
science are to be reached, it is held that on account 
of the variety and complexity of the influences to 
which economic phenomena are subject, the method of 
specific experience or direct induction is inadequate to 
yield more than empirical generalizations of uncertain 
validity. Experiment is, moreover, a resource from 
which the economist is debarred. It follows that 
we ought not to take as our starting point the 
analysis of concrete industrial facts. The right method 
of procedure is, on the contrary, deductive, or, as Mill 
puts it, « priori. The ultimate premisses upon which 
the deductive science is based are, moreover, limited in 
number, so that the more important of them admit of 
precise enunciation at the outset. For while the cir- 
cumstances helping in some degree to mould economic 
phenomena are indefinitely numerous, there are a few 
whose influence is predominant, far outweighing that of 
all the rest. These predominating circumstances con- 
sist of a few simple and indisputable facts of human 
nature — as, for example, that in their economic dealings 



I.] DOCTRINES OF MILL AND CAIRNES. 15 

men are influenced by the desire for wealth — taken 
in connexion with the physical properties of the soil, 
and man's physiological constitution \ 

Political economy is accordingly spoken of as, in the 
main, an abstract science. For in basing its conclusions 
on a limited number of fundamental assumptions, it 
has to leave out of account many circumstances, which 
are of importance in individual cases, but are never- 
theless UDimportant when instances are taken in the 
mass. That other motives besides the desire for wealth 
do operate on various occasions in determining men's 
economic activities is recognised. They are, however, 
to be neglected — at any rate in the first instance 
— since their influence is irregular, uncertain, and 

1 There is, however, some difference of view as to the extent to 
which the appHcation of the resulting doctrines needs limitation. 
Bagehot regards the doctrines of English political economy as not 
applicable to all states of society, but only to those in which com- 
merce has largely developed, and in particular taken the form of 
development which we find in England at the present time. The 
relativity of economic investigations is also indicated incidentally by 
Cairnes. Senior, on the other hand, remarks that those conclusions 
which relate to the nature and the production of wealth are universally 
true ; and although those which relate to the distribution of wealth 
are liable to he affected by the particular institutions of particular 
countries, still the natural state of things can be laid down as the 
general rule, and the anomalies produced by particular distux-bing 
causes afterwards accounted for. In other words, while Bagehot 
regards the premisses of political economy as relating only to the 
economic habits and institutions of a particular age and country, 
Senior regards them as "natural," and, with slight qualifications, as 
independent of age and country. 



16 INTRODUCTORY. [CHAP. 

capricious. On these grounds, it is argued that the 
abstraction, whereby the science takes as its principal 
subject-matter an "economic man," whose activities 
are determined solely by the desire for wealth, is both 
legitimate and necessary; and, in further justification 
thereof, an analogy is drawn from mathematics and 
physics, which are said to be based upon corresponding 
abstractions \ 

On similar grounds, the science is spoken of by 
Mill and Cairnes as hypothetical. For inasmuch as its 
premisses do not exhaust all the causes affecting the 
result, its laws are only true hypothetically, that is, 
in the absence of coun^racting agencies. The same 
point is expressed by saying that political economy is 
a science of tendencies only, not of matters of fact, its 
object being to work out and ascertain the result of 
certain great forces, as if these alone operated, and 
nothing else exerted any modifying influence^. 

Senior sums up his views in the dictum that poli- 
tical economy " depends more on reasoning than on 

1 Mill and Bagehot specially insist upon the high degree of ab- 
straction involved in economic reasonings. Bagehot more than ouce 
repeats that " English political economists are not speaking of real 
men, but of imaginary ones ; not of men as we see them, but of men 
as it is convenient to us to suppose they are" {Economic Studies, p. 5). 

- Senior, while affirming that the conclusions of jiolitical economy 
are true only in the absence of disturbing causes, still calls it a posi- 
tive, as distinguished from a hypothetical, science. By this he means 
that its premisses are not arbitrarily assumed. 



I.] DOCTRINES OF MILL AND CAIRNES. 17 

■observation." Mill, Cainies, and Bagehot, however, all 
insist that the appeal to observation and experience 
must come in, before the hypothetical laws of the 
science can be applied to the interpretation and expla- 
nation of concrete industrial facts. For it then has to 
be ascertained how far, as regards the particular cases 
under consideration, allowance needs to be made for 
the operation of disturbing causes — that is, for the 
peculiar modifications introduced by the minor in- 
fluences affecting economic phenomena. Comparison 
with observed facts provides a test for conclusions 
deductively obtained, and enables the limits of their 
application to be determined. Accordingly, while the 
method of specific experience is regarded as altogether 
inefficacious for the discovery of economic laws, and 
as incapable of affording independent proof of their 
validity, it is nevertheless considered to form an indis- 
pensable supplement to the deductive reasoning that 
constitutes the framew^ork of the science. 

The above doctrines of economic method, which are 
those explicitly formulated by the writers referred to, 
need to be interpreted and in some respects qualified 
by reference to their actual economic writings. For 
if, from an examination of the latter, we seek to 
deduce their views on method, we find that their prac- 
tice does not precisely correspond with their theory; 
and we are led to the conclusion that, judged by their 
K. 2 



18 INTRODUCTORY. [CHAP. 

own writings, they state their doctrines on method in 
too absolute a manner, in particular exaggerating the 
abstractness of political economy taken as a whole. 
They also speak as if" the science had reached the 
deductive stage in a more definitive manner than is 
apparent from their own way of dealing with economic 
problems. 

In treating of the production of wealth, for 
example, as is pointed out by Professor Sidgwick, 
Mill and other economists of his school have always 
employed an inductive and analytical method, the de- 
ductive element in their reasonings being in this part 
of their subject essentially subordinate. Mill is even 
more distinctly an inductive economist in his elaborate 
discussion of peasant proprietorship in its economic 
aspects. There is no doubt a deductive element, based 
on psychological data, in his argument as to the effect 
of ownership on the cultivator's industry and energy. 
But even on this point he brings a considerable amount 
of d poste7'iori evidence to bear ; and his general argu- 
ment depends mainly on an inductive and comparative 
investigation of the actual working of peasant pro- 
prietorship in France, Switzerland, and other countries, 
in which the operation of the system can be observed 
on a considerable scale. Cairnes, again, in his work 
on the Slave Poiver, where he analyses the general 
economic characteristics of slave labour, establishes some 



I.] J. S. MILL. 19 

important economic doctrines by a careful inductive 
study of facts, comparatively little use being made of 
deductive reasoning. 

It is true that the general theory of distribution and 
exchange, expounded by the school of Mill, is based 
on reasoning of an abstract character; but even here 
the writers, to whom reference has been made, tend to 
exaggerate the characteristics of their own method. 
They do not hold themselves aloof from the concrete 
realities of the actual economic world to anything like 
the extent that their description of the science would 
lead their readers to anticipate ; and it is very far 
from the truth to say that their doctrines are wholly 
constructed out of a few elementary laws of human 
nature. At all events, in order to establish their 
consistency, a large portion of their best economic 
work must be regarded as concerned with the practical 
modifications of the truths of political economy, rather 
than with those truths themselves. 

The contrast is specially marked between Mill's 
theory of method as contained in the Essays, and his 
practice as manifested in the Pinnciples. In the former, 
the conception of the " economic man " occupies a 
position of central and all-pervading importance ; in 
the latter, it plays a much humbler part. Moreover, 
in his Principles of Political Economy, Mill avowedly 
treats, not merely of these principles themselves, but 

2—2 



20 INTRODUCTORY. [CHAP. 

also of "some of their applications to social philosopby." 
He states in his preface that while he desires to give 
an exposition of the abstract doctrines of political 
economy, he also desires to give something more than 
this; his object is to include "a much wider range of 
ideas and of topics, than are included in political 
economy, considered as a branch of abstract specula- 
tion." Moral and social considerations, in the widest 
sense, receive accordingly their due share of attention ; 
and it would be difficult to find a better instance of an 
ethical treatment of economic problems than is con- 
tained in the chapter on " the probable future of the 
labouring classes." 

§ 3. The conception of political economy as an 
ethical, realistic, and inductive science. — The emphasis 
with which the earlier systematic writers on economic 
method, especially in England, dwelt upon the abstract 
side of political economy led to a reaction, which took 
its rise in Germany, and is especially connected with 
the names of Reseller, Hildebrand, and Knies. The 
two schools, thus broadly distinguished, are sometimes 
spoken of as the English and the German respectively. 
These designations have the merit of brevity ; and, taking 
into account what was actually written about method 
by English and German economists respectively during 
the middle part of the nineteenth century, they are 
not without justification. They must not, however, be 



I.] ENGLISH AND GERMAN SCHOOLS. 21 

interpreted too literally. The doctrine of method set 
forth in the preceding section does not fairly represent 
the many-sidedness of English work in economics. 
In particular, it fails to assign a sufficiently important 
place to the mass of historical and statistical material 
that the labour of English economists has provided. 
The doctrine would, moreover, be accepted only in 
a modified and broadened form by those contemporary 
economists who avowedly carry on the traditions of 
the English school. Again, the so-called German 
doctrines, whatever may have been their origin, are 
no longer the peculiar possession of any one country. 
They are, for example, represented by a rising school 
of economists in the United States, who expressly 
repudiate the assertion that the new movement 
is exclusively a German movement. Even in England 
the spirit of the reaction was manifested long ago by 
Richard Jones, and in more recent years very forcible 
expression has been given to it by Chff'e Leslie and 
others. On the other hand, amongst distinguished 
economists who have employed a highly abstract 
method of treating economic problems, several Germans, 
e.g., von Thlinen, are to be included ; and recently there 
has sprung up in Austria a new school, which insists 
very emphatically on the necessity of an abstract treat- 
ment of the science \ 

1 Professor Carl Menger of Vienna is one of the principal leaders 



22 INTRODUCTORY. [CHAP. 

Subject to the foregoing explanation, it is con- 
venient to speak of the school of Roscher and Knies 
as the Gernaan school. The explicit teaching of this 
school in regard to the scope and method of economics 
is briefly indicated in the following paragraphs^ 

lu the first place, a more extended scope is given 

in this later development of German opinion. Compare his Unter- 
sHcliunfien fiber die Methode der Socinlwissenschaften und der Politischen 
Oclonomie inshesondere. He specially insists on the necessity of dis- 
tinguishing theoretical political economy from economic historj^ and 
statistics on the one hand, and from the practical sciences of political 
economy on the other ; and he accuses the dominant German school 
both of misunderstanding the point of view of the abstract method, 
and of attributing an exaggerated importance to the historical. He 
further charges them with error in attempting to give an ethical 
direction to theoretical political economy. He speaks still more 
strongly in a very controversial series of letters specially directed 
against SchmoUer, and ijublished under the title Die Irrthiivier des 
Historismns in der Deutschen Nationnlokonomie . Professor Emil Sax 
of Prague is in agreement with Menger on fundamental points, but 
presents his views in a less controversial form. He insists strongly 
on the imjjortance of jjure theory. Compare his Wesen und Aufgahen 
der Nationalokonoviie. 

^ On the points that follow compare Roscher, Genchichte der 
National-Oehonomih in Deutschland, especially pp. 1032 — 1036 ; 
Knies, Die Politische Oekonomie vom Standpunkte der gescliichtlichen 
Methode ; Schonberg's article on Die Volks^virthschaft (in his Hand- 
hiicli), §§ 1 — 18 ; and Wagner, Systemotische Nationardkoiwmie in the 
Jdlirhiicher fiir Nationalokonoviie und Statistik, March, 188(5 (trans- 
lated in the Qunrterhj Journal of Economics, vol. i., p. 113). A good 
historical account of the new German political economy of which 
the foundations were laid in the years 1842 — 53, principally by 
Roscher, Hildebrand, and Knies, is given in Cohu's System der Na- 
tionalokonomie, Grnndleyunp, §§ 108 — 122. See also Professor Ashley's 
article on the Historical School of Economists in Mr Palgrave's Dic- 
tionary of Political Economy. 



I.] THE GERMAN HISTORICAL SCHOOL. 23 

to the science than is usual with English economists ; 
for it is avowedly made to treat of what ought to be 
as well as of what is. The possibility of drawing 
any clear line of separation between these enquiries is, 
indeed, practically denied. It is held that there can 
be no purely positive science of political economy, such 
as was contemplated by Cairnes. 

The school explicitly calls itself ethical ; it regards 
political economy as having a high ethical task, and as 
concerned with the most important problems of human 
life. The science is not merely to classify the motives 
that prompt to economic activity ; it must also weigh 
and compare their moral merit. It must determine 
a standard of the right production and distribution of 
wealth, such that the demands of justice and morality 
may be satisfied. It must set forth an ideal of eco- 
nomic development, having in view the intellectual 
and moral, as well as the merely material, life, and 
it must discuss the ways and means — such as the 
strengthening of right motives, and the spread of 
sound customs and habits in industrial life, as well 
as the direct intervention of the State — by which that 
ideal is to be sought after \ 

1 It should be observed that differences in regard to tlie scope of 
a science may be to a considerable extent merely verbal. One ^yriter 
may include within the science itself enquiries which another writer 
regards as belonging only to its applications ; but it does not follow 
that the latter neglects these enquiries, or even in the slightest degree 
attaches less importance to them. 



24 INTRODUCTORY. [CHAP. 

Another characteristic of the German historical 
school is the manner in which its adherents insist 
upon the social side of political economy, and the inter- 
dependence of economic and other social phenomena. 
It is held that, because of this interdependence, political 
economy cannot be treated adequately except in close 
connexion with other branches of social science. The 
treatment adopted ought, accordingly, to be realistic. 
It is maintained that the economist should only very 
sparingly, if at all, abstract from the complex realities 
of actual economic life ; and should consequently in 
most of his reasonings deal, not with an abstract " eco- 
nomic man," subject only to a single motive, the desire 
for wealth, but directly with men as they really are, 
moved by diverse motives, and influenced by the actual 
conditions of the age and society in which they live. 
Closely connected with this characteristic is the insist- 
ence upon the relativity of economic doctrines. The 
economic conditions of life are subject to variation : 
and subject to like variation are the laws by which 
men's economic activities are regulated. 

As to the method of reasoning by which economic 
knowledge is to be extended, great stress is laid on the 
necessity of appealing constantly to specific observation 
of the actual economic world, and generalizing there- 
from. Hence the school is spoken of as inductive and 
statistical. It is still more distinctively designated 



I.] THE GERMAN HISTORICAL SCHOOL. 25 

historical, from its special insistence on the importance 
of historical material in building up the science. Only 
b}!" reference to the past, it is held, can the present be 
properly understood ; and only by a comparison of the 
economic conditions of different periods and different 
countries can the limitations of economic doctrines be 
adequately realised, and economists saved from one- 
sided and narrow dogmatism. The importance of 
studying the course of economic evolution is, accord- 
ingly, emphasized. 

It should be addedthat, independently of differences 
in regard to the scope and method of political economy, 
the dominant German school is distinguished from 
the older English economists by a difference of attitude 
towards laisser faire and government interference. 
This is, however, a point of contrast with which we are 
not directly concerned in the present treatise. 

It will be observed that the above-mentioned charac- 
teristics are by no means independent of one another. 
In some cases the connexion is very close indeed. The 
more realistic our standpoint, for example, the more 
obvious becomes the necessity of direct appeals to 
history and statistics ; the historical method leads per- 
force to the recognition of the relativity of economic 
doctrines ; and the realistic and the social standpoints 
are also closely connected. In its turn, the ethical con- 
ception of the science emphasizes all the other points ; 



26 INTRODUCTORY. [CHAP. 

and in fact, if it be granted that political economy is 
directly concerned with what ought to be, then most 
of the rest may be said logically to follow \ It results 
from this dependence of characteristics that in discuss- 
ing the various questions at issue a certain repetition 
is unavoidable. Accordingly, in the following pages, 
even when we are treating apparently distinct pro- 
blems, there will not unfrequently be found a recurrence 
of the same fundamental points, viewed in different 
aspects. 

Within the new school itself marked differences 
of tone and attitude are to be observed. The more 
advanced members of the school are not content with 
emphasizing the importance of the historical method, 
but go so far as to reject the aid of any other method 
except in extreme subordination to it. They are not 
simple reformers, but revolutionaries ; for they advocate 
a complete reconstruction and transformation of politi- 
cal economy. In their view, the science in the past has 
been barren of valuable results ; oiily by a radical 
change of method can it hope to be fruitful in the 
future. The old doctrines, and the old ways of reaching 
them, are to be put on one side and seen no more. 
Professor Schmoller and Dr Ingram may be taken as 

1 It will be shewn, however, that the converse does not hold good ; 
that it is, in other words, possible to adopt a realistic treatment of 
economic problems without passing ethical judgments. 



I.] DOCTRINES OF ROSCHER AND WAGNER. 27 

examples of this advanced wing of the new school. 
The former would practically identify political economy 
and economic history, or at any rate resolve political 
economy into the philosophy of economic history. The 
latter, whose aim is somewhat different, though he is 
equally revolutionary in his tendency, would absorb 
political economy into general sociology. 

The position taken by the more moderate adherents 
of the German school, including Roscher himself, is in 
marked contrast to the above. They adopt a tone of 
moderation and an attitude of compromise. While in- 
sisting on the importance of historical investigation in 
political economy, they admit the necessity of em- 
ploying other methods in conjunction therewith ; and 
while taking a realistic view of the science as a whole, 
they recognise the value of abstraction, at any rate in 
certain preparatory stages. They accept many of the 
most characteristic of the old conclusions, and on the 
old grounds. According to Professor Adolph Wagner, 
who may be taken as a leading representative of the 
more moderate section of the new school, the inductive 
and deductive methods both have their place in econo- 
mics. "These, then," he says, "are the two methods : 
on the one hand, deduction from psychological mo- 
tives — first and foremost, deduction from the motive 
of individual advantage, then from other motives; on 
the other hand, induction from history, from statistics, 



28 INTRODUCTORY. [CHAP. 

and from the less exact and less certain, yet indis- 
pensable, process of common observation and ex- 
perience. With both methods we are to approach the 
various problems of political economy, and to solve 
them so far as we can. Which method is most to be 
used depends on the nature of the particular problems; 
but it depends also on the turn of mind, very likely on 
the accident of training and education, of the individual 
investigator."* 

1 Quartcrh/ Journal of Economics, vol. i., p. 124. In his Lehr- und 
Handbuch dcr poUtischen Oekonomie, vol. i., p. 17, Wagner writes further 
in the same strain. " It is not," he says, " a question of completely 
changing the method of deduction, nor of entirely replacing it by the 
method of induction. It would not be possible to attain the latter 
aim ; and, if it were possible, it would be neither right nor desirable. 
The problem is to obtain an improvement in deductive procedure, a 
more refined and deeper psychological foundation and development 
of it, and a more careful application, particularly in concrete practi- 
cal questions. To this must be added constant attention to the 
hypotheses from which deductions are being made, and a keener 
discernment of the necessary limits of the applicability of the method. 
In short, the true solution of the contest about method is not to be 
found in the selection of deduction or induction, but in the accept- 
ance of deduction and induction. Each must be employed in the 
cases where it is specially adapted to the particular nature of the 
jsroblem to be solved, and as far as possible — for it is not always 
possible — there must be a combination of both, although in concrete 
cases one or the other will take precedence." Dr von Scheel ex- 
presses himself similarly. Different methods, he says, are service- 
able for the solution of economic problems. '' We must use both 
inductive and deductive methods. The most suitable method will 
continually vaiy with the particular nature of the problem to be 
solved " (Schoaberg's Handbuch, Die politische Oekonomie ah Wissen- 
schaft, § 3). Professor Gustav Cohn may be quoted to the same 
effect. The idea, he says, that mei'e collections of historical or 



I.] DIFFERENT METHODS SERVICEABLE. 29 

§ 4. Tlie method of political economy cannot ade- 
quately he described by any single phrase. — We must 
not then exaggerate the opposition between what may 
be called the classical English school and the new 
school. The former realise more vividly the abstract 
problems of the science, and in writing on method 
keep these problems mainly in view. The latter realise 
more vividly the concrete problems, and hence lay 
stress on all the points which the English school have 
tended to overlook. But the difference is strictly 
speaking one of degree ouly ; and we find the oppo- 
sition reduced to a minimum, when we compare the 
actual procedure in the solution of given problems 
adopted by the best contemporary economists, whether 
they profess to beloDg to the new school or are content 
to be classed with the old^ 

statistical material can be made available for science, without de- 
ductive aids, is just as much an extravagance, as the opposite idea that 
out of deductions from elementary hypotheses the whole science can 
be constructed {Grundlegung der Nationalokonomie, p. 35). Dr E. R. A. 
Seligman, again, writing on behalf of the American supporters of 
the new movement, remarks that the more extreme of the Germans 
"have themselves overshot the mark, have unduly undervalued the 
work of the English school, and have in their zeal too dogmatically 
denied the possibility of formulating any general laws" (Science 
Economic Discussion, p. 21). 

1 In 1890, when the first edition of this work was published, the 
controversies referred to in this chapter were gradually becoming less 
acute ; and since 1890 there has been a further advance towards a 
mutual understanding on the part of economic theorists and economic 
historians. Compare Professor Ashley, On the Study of Economic 
History {S^lrveys: Historic and Economic, pp. 1 — 21). 



30 INTRODUCTORY. [CHAP. I. 

As to the doctrine to be expounded in the following 
pages, it will suffice here to say that while great im- 
portance will be attached to the place of the deductive 
method in economic enquiry, and while a protest will 
be entered against the unhistorical spirit evinced by 
those adherents of the new movement who proclaim 
the necessity for a complete reorganization of the 
science, still no attempt will be made to justify the 
doctrines of the older school in the precise form in 
which they were laid down by Mill and Cairnes. The 
method of political economy cannot adequately be de- 
scribed by any single phrase ; and accordingly no one 
method will be advocated to the entire exclusion of 
other methods. It will, on the contrary, be shewn 
that, according to the special department or aspect 
of the science under investigation, the appropriate 
method may be either abstract or realistic, deductive 
or inductive, mathematical (jr statistical, hypothetical 
or historical. 



CHAPTER II. 

ON THE RELATION OF POLITICAL ECONOMY TO 
MORALITY AND PRACTICE. 

§ 1. Distinction between economic uniformities, 
economic ideals, and economic precepts. — As regards 
the scope of political economy, no question is more 
important, or in a way more difficult, than its true 
relation to practical problems. Does it treat of the 
actual or of the ideal ? Is it a positive science con- ! 
cerned exclusively with the investigation of uni- 
formities, or is it an art having for its object the 
determination of practical rules of action ? What, 
for example, is the true problem of political economy 
in regard to the influence of competition on wages ? 
Is it to investigate the precise nature of that influence, 
and to enquire how far and in what ways the operation 
of competition is or may be modified by other agencies ? 
Or is it rather to determine how far the effects of 
competition can be morally approved, and to what 
extent it is desirable that its operation should be 
supplemented or superseded by combination or direct 
governmental interference ? 



32 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

The distinction here indicated is indeed threefold 
rather than twofold as is usually implied. For when 
we leave the enquiry into the veritable order of eco- 
nomic phenomena, their coexistences and sequences, 
under existing or assumed conditions, we still have to 
take account of a further subdivision of some signifi- 
cance. I There is, on the one hand, the investigation 
of economic ideals and the determination of a standard 
by reference to which the social worth of economic 
activities and conditions may be judged; and there is 
also the investigation of economic rules, i.e., the de- 
termination of maxims or precepts by obedience to 
which given ends may best be attained'. Thus, in 

1 There is still another distinction, which need not, however, be 
dwelt upon — namely, the distinction between economic maxims as 
formulated by the student, and their practical outcome in the actual 
legislation of different countries. Even this distinction is not always 
clearly recognised. It seems, for instance, to be obscured in the 
following passage in Lord Bramwell's address as President of Section 
F of the British Association: "What will be the best way to add 
to the wealth of a society must be a subject of study by that 
society, which will lay down rules — that is to say, make laws — for 
the purpose ; and this is political economy. Adam Smith was not 
the first political economist, though well called the father of those 
rules which now prevail. But rules for the purpose existed before 
him, the great objection to them being that most of them were wrong. 
There was a law that the dead should be buried in woollen. Laws 
were made for fixing wages ; laws were made against regrating and 
forestalling. Then think of the usury laws. You cannot deny that 
these were economical laws because you think them wrong." The laws 
here referred to cannot in any proper sense be called laws of political 
economy. Even if political economy is regarded as an art, the 
precepts of that art must be distinguished from the actual practice 



II.] UNIFORMITIES, IDEALS, AND PRECEPTS. 33 

regard to the payment of interest; we have, first, the 
positive enquiries why, under certain conditions of in- 
dustry, interest is paid at all, and what determines the 
rate paid. We have, secondly, the enquiries whether 
interest ought to be paid-, and, if it ought, what 
constitutes a fair rate of interest. We have, thirdly, 
the enquiries whether any interference in regard to 
the payment of interest is desirable, and, if so, what 
are the best means whereby such payment may either 
be abolished or at least approximated to a fair 
standard. 

Another illustration may be taken from the depart- 
ment of taxation. The investigation of the incidence 
of taxation is in itself a positive enquiry ; so is the 
problem of the influence of different forms of taxation 
on relative values. These are, in other words, enquiries 
as to matters of fact. Passing to problems that 
belong to a different category, we may distinguish the 
determination of the ideal of taxation from that of 
rules of taxation in the narrower and stricter sense. 
It is one thing to ask in what sense, if any, and why, 
equality of taxation should be our aim ; it is another 
thing to enquire by what rules, e.g., the adoption of 
a system of progressive taxation or the judicious 
combination of direct and indirect taxation, such 

of politicians and finance ministers, however much their acts may be 
the direct legislative embodiment of the precepts. 

K, 3 



84 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

equality can with the nearest possible approximation 
be attained. 

Intimate as are the connexions between the above 
kinds of enquiry, they are in themselves distinct in 
character, and belong to different departments in a 
classification of knowledge. The first belongs to positive 
science, the second to normative or regulative science 
(along with ethics, if indeed it be not a branch of 
ethics or of what may be called applied ethics), and 
the third not to science at all in the more modern use 
of the term, but to art as distinguished therefrom. 

As the terms are here used, a positive science may 
be defined as a body of systematized knowledge con- 
cerning what is^; a norwMive or regulative science as 
a body of systematized knowledge relating to criteria of 
what ought to be, and concerned therefore with the ideal 

1 The iise of the term positive to mark this kind of enquiry is not 
altogether satisfactory ; for the same term is used by Cairnes and 
others in contrast to hypotJietical, which is not the antithesis here 
intended. It is ditticult, liowever, to find any word that is quite free 
from ambiguity. Theoretical is in some respects a good term and may 
sometimes he conveniently used. In certain connexions, however, it is 
to he avoided, inasmuch as it maybe understood to imply an antithesis 
with actual, as when theory and fact are contrasted ; it may also 
suggest that the enquiries referred to have little or no bearing on 
practical questions, which is of course far from being the case. Pro- 
fessor Sidgwick in his Methods of Ethics employs the terra speculative ; 
hut this term, even more than the term theoretical, suggests some- 
thing very much in the air, something remote from the common 
events of every-day life. It seems best, therefore, not to use it in the 
present connexion. 



IT.] UNIFORMITIES, IDEALS, AND PRECEPTS. 35 

as distinguished from the actual^; an art as a system of 
rules for the attainment of a given end". The object of 
1 a positive science is the establishment of unifof-mities, 
of a normative science the determination of ideals, of 
an art the formulation of precepts. 

The problem whether political economy is to be 
regarded as a positive science, or as a normative 
science, or as an art, or as a combination of these, 
is to a certain extent a question merely of nomen- 
clature and classification. It is, nevertheless, important 
to distinguish economic enquiries according as they 
belong to the three departments respectively ; and it 
is also important to make clear their mutual relations. 
Confusion between them is common, and has been the 
source of many mischievous errors. 

An endeavour will be made in the following pages 

1 It should be particularly observed that a department of know- 
ledge does not necessarily belong to the category of art, as distinguished 
from science, simply because it is concerned with what ought to be. 
Logic and ethics are both of them sciences, although they are con- 
cerned with right reasoning and right conduct respectively. In the 
following pages, however, whenever science is contrasted with art 
without further qualification, positive science, and not normative 
science, is had in view. 

" To avoid misunderstanding, it should be added that Adam Smith 
and his contemporaries, as well as some modern economists, use the 
term science without any reference to the distinction between science 
and art as above indicated. They mean by a science any systematic 
body of knowledge, whether consisting of theoretical propositions, or 
of practical rules of action. The best recent authorities, however, at 
any i-ate in this country, use the term in the narrower sense. 

3—2 



36 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

to shew that it is both possible and desirable to discuss 
economic uniformities independently of economic ideals, 
and without formulating economic precepts, although 
the converse proposition cannot be affirmed ; and it 
follows that, if this view be correct, we ought at least 
to recognise as fundamental a positive science of 
political economy which is concerned purely with what 
is, and which seeks to determine economic Imus^. It is 
a further question whether or not we shoidd also 
recognise, as included under political economy in the 
widest sense — but distinct from the positive science— 
(a) a branch of ethics which may be called the ethics 
of political economy, and which seeks to determine 
economic ideals ; and (6) an art of political economy, 
which seeks to formulate economic precepts. 

' We here use the term law, as it will consistently be used in the 
following; pages, in its scientific, and not in its jurisprudential, sense. 
We mean by a laio a theorem, the statement of a uniformity, not 
a command enforced by sanctions. The law of supply and demand, 
the Ricardian law of rent, Gresham's law, and the like, may be given 
as examples of economic laws in the above sense. The validity of 
such laws is a purely theoretical question, and our attitude towards 
them is not, or at any rate should not be, affected by our ethical or 
political views. It is otherwise as soon as we begin to lay down rules 
for the guidance of statesmen and legislators. When we argue for 
fair trade or for free trade, when we advocate the legislative re- 
striction of hours of labour or the nationalization of the land, or 
when we contend for a general policy of laisscr faite, we have 
advanced a stage further. Considerations based on political economy, 
conceived as a positive science, may still form the foundation of 
our argument, but such data have to be controlled by ethical and 
political considerations. 



II.] THE SCOPE OF POLITICAL ECONOMY. 37 

§ 2. The 'possibility of studying economic laws or 
uniformities tuithout passing ethical judgments or 
formulating economic precepts. — It has been pointed 
out in the preceding chapter that the prevailing 
tendency amongst a certain school of economists is 
to widen the scope of political economy by giving it 

J a distinctly ethical character and making little attempt 
to separate its treatment as a practical science from 
its treatment as a theoretical science. It is even 
maintained that such a separation is impossible. Thus 
Professor Wagner, while clearly distinguishing the 
positive and the ethical problems, denies that either 
of them admits of being treated apart from the other, 
although taken together their treatment may be 
separated from that of the dependent art. He gives 
the five following problems (of which the first two 
belong to positive science as above defined, the third 
and fourth to normative or ethical science, and the 
fifth to art) as between them constituting the great 
general problem of political economy : (1) the description 
of economic phenomena ; (2) the explanation of the 
causes upon which they depend ; (3) the determination 
of a standard by which their social merit may be 
measured ; (4) the setting up of an aim for economic 

■progress ; (5) the examination of the ways and means 
for attaining this aim. Of these problems he regards 
the first four as too closely connected to permit 



38 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

a separation. Only the fifth, he considers, where we 
have to deal with the practical questions of an art, can 
be clearly distinguished from the rest^ Others would 
not even admit the degree of separation that Wagner 
allows. ]Jr von Scheel, for instance, remarks that the 
history, theory, and art of political economy form one 
indivisible whole". 

Yet on refiection it seems clear that there can be 
no inherent reason why we should not both describe 
and explain economic phenomena without either passing 
a judgment on their moral worth or setting up an aim 
for economic progress ; although of course the converse 
does not hold good. It is clear, for example, that 
we cannot determine how nearly the results of free 
competition approximate to our economic ideal until 
we know what those results are. Nor can we say 
how far it is desirable that the effects which would be 

1 Quarterly Journal of Economics, vol. i., pp. 12i — 128. lu a 
later edition (1892) of his GrundleguuQ der politischen Oekonomie, §§ 57 
— 64, Wagner interpolates between (1) and (2) as given above a third 
theoretical problem, namely, the discovery of types. This yields a 
symmetrical and interesting scheme in which we have three theoretical 
and three practical problems. It is to be observed that in the edition 
of the Grundlegung to which reference is here made, Wagner seems 
more willing to admit the possibility of a separate discussion of the 
three theoretical problems, although he regards all six problems as 
involved iu a complete treatment of any economic question. This 
must be granted; but we may at the same time clearly distinguish 
between economic science in the strict sense, the ethics of political 
economy, and applied economics. 

- Schouberg's Handbuch, vol. i., pp. 71, 72. 



IT.] THE CONNEXION BETWEEN SCIENCE AND ART. 39 

brought about by unimpeded competition should be 
modified by governmental interference or voluntary 
combination, until we have also ascertained what kind 
of modification would ensue, and what would be the 
collateral effects of such interfering agencies. We 
can, however, successfully investigate the nature of 
economic phenomena under the regime of competition, 
without comparing them with any ideal standard ; and 
we can also correctly ascertain the effects exerted, 
or capable of being exerted, by agencies other than 
competitive — such as law, public opinion, voluntary 
combination, and the like — without expressing an 
opinion on the practical question how far it is desirable 
that the operation of agencies such as these should be 
specially encouraged ^ 

1 In discussing tlae connexion between science and art, it is 
necessary to distinguisli the lo(jical order from wliat may be called 
the historical order. It has often been pointed out that while in the 
logical order science precedes art, the historical order is the reverse of 
this. The reason is that the demand for guidance arising from men's 
practical needs is recognised, and attempts are made to satisfy it, 
before bodies of speculative truth are systematically formulated. 
Thus an empirical art of medicine exists before there is any distinct 
science of physiology. Indeed, as is remarked by Sir George 
Cornewall Lewis, "the purely scientific treatment of any subject, 
without an attempt to lay down precepts or rules of practice, is in 
general one of the latest stages in the journey of knowledge" 
(Methods of Observation and Reasoning in Politics, Chapter 19, § 5). 
But, as we have said, in the logical order science precedes art, 
for we cannot satisfactorily lay down rules for practical guidance 
except on the basis of knowledge of facts. When, therefore, this 
knowledge is not to be found elsewhere, the art must seek it as best 



40 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

The proposition that it is possible to study economic 
uniformities without passing ethical judgments or 
formulating economic precepts seems in fact so little to 
need proof, when the point at issue is clearly grasped, 
that it is difficult to say anything in support of it that 
shall go beyond mere truism. We may, however, seek 
to explain away certain difficulties, based on misappre- 
hension, that have tended to prevent its truth from 
being universally recognised. The idea probably is that 
any attempt to treat economic laws, without passing 
ethical judgments, and without reference to an ideal to 
be aimed at, is certain to result in a practical denial 
that moral considerations have any bearing on economic 

it can for itself, thus becoming at the same time both a science and 
an art, the two enquiries, however, not being definitely distinguished. 
Strictly speaking, instead of saying that historically art pi'ecedes 
science, it would for the above reason be more accurate to say that at 
the outset there is no clearly marked line of distinction between them. 
Accordingly in early treatises on any art we expect to find, and we do 
find, theorems of science more or less explicitly set forth, justifying 
the rules which it is the authors' main purpose to expound. Herein 
is the explanation of the fact that, while Adam Smith conceives 
political economy as an art, the Wealth of Natioiis assumes for the 
most part the form of a science. The system of political economy 
there advocated, being " the obvious and simple system of natural 
liberty," does not in itself consist of any elaborate code of rules. 
Adam Smith is chiefly concerned to confute on scientific grounds 
other systems, and to establish the scientific basis of his own. His 
first three books, to a large extent his fourth, arid to some extent 
his fifth, are thus taken up with discussions in which the actual 
relations of phenomena are discussed and expounded. On this point, 
compare Sidgwick, Principles of Political Economy, Introduction, 
Chapter 2. 



II.] ECONOMIC ACTIVITIES SUBJECT TO MORAL LAWS. 41 

phenomena at all. It has indeed been made a specific 
charge against English economics of the middle part of 
the nineteenth century that, seeking to be purely theo- 
retical, it became in the worst sense immoral, its tendency 
being to claim for economic action a sphere altogether 
independent of moral laws. 

Whilst it would be difficult to substantiate this 
charge by reference to the actual writings of English 
economists of the first rank at any period, a certain justi- 
fication for it may be found in the tone and attitude of 
some popular interpreters of economic science at the 
time referred to ; and it will be useful to seek to dis- 
cover the source of the error into which they fell. 
That it was an error hardly needs to be insisted upon. 
Nothing can be more deplorable than that the econo- 
mist should be undei-stood t£ imply that, in his 
industrial dealings, a man is freed from the ordinary 
obligations of justice and humanity. To refer an 
injustice in the economic world to demand and supply 
may possibly account for it ; but it cannot seriously be 
maintained that from the point of view of the moralist 
or the social reformer this settles the matter. It needs 
no proof that neither economic activities nor any other 
class of human activities can rightly be made inde- 
pendent of moral laws. 

But it is far from being the case that the falla- 
cious attitude of mind here combated is a necessary 



42 POLITICAT- ECOxNOMY AND PRACTICE. [CHAP. 

consequence of the attempt to construct a purely 
positive science of economics. On the other hand, it is 
rather the failure to recognise the fundamentally distinct 
character of enquiries into what is, and enquiries into 
what ought to be, that is really responsible for attempts 
to solve practical economic questions without reference 
to their ethical aspects. And this danger will certainly 
not be diminished by endeavouring systematically to 
fuse the two classes of problems. There is, however, 
a further source of confusion, to which it is necessary 
at this point specially to call attention, due to the 
non-recognition of the fact that from the purely 
positive standpoint the operation of moral forces may 
need to be taken into account. It has too often been 
implied, though it may not often have been expressly 
stated, that- — at any rate in regard to what can actually 
happen, as distinguished from what one might desire 
to see happen — the last word has been said when the 
effects of competition have been correctly ascertained 
and set forth ^ As a matter of fact, although the 

1 In Kingsley's Alton Locke we are told how a member of Parlia- 
ment — one that was i-eputed a philosopher, and a political economist, 
and a Liberal — replied to a deputation of working men that however 
glad he would be to help them, it was impossible — he could not alter 
the laws of nature — wages were regulated by the amount of com- 
petition among the men themselves, that is, by the laws of political 
economy, which it would be madness and suicide to oppose (ch. 10). 
No doctrine so crude as this, however, is taught by leading English 
exponents of the science. " The distribution ol wealth," says J. S. 



II.] OPERATION OF MORAL FORCES. 43 

forces of competition may usually exert a prepon- 
derating influence in the economic world, they have 
not the universality and necessity which is here as- 
cribed to them, nor are they incaj)able of being, as 
we may say, moralized. Economic phenomena depend 
upon the activity of free agents, whose customary 
behaviour may be modified not merely by legislative 
interference, but also b3^ changes in their own moral 
standard, or in the social pressure brought to bear upon 
them by public opinion ; and it follows that, in general, 
we are not justified in assuming finality in regard to 
concrete industrial facts, or in affirming that, in the 
economic world, what is must be. It is true that 



Mill emphatically, "depends on the laws and customs of society. The 
rules by which it is determined are what the opinions and feelings 
of the ruling portion of the community make them, and are very 
different in different ages and countries ; and might be still more 
different, if mankind so chose" (Political Economy, ii. 1, § 1). By 
" the ruling portion of the community" we ought here to understand 
not merely those who have a voice in framing a country's laws, but 
also those who mould iDublic opinion and exert an influence on the 
moral tone of a people. Compare further Mill's Autohiograpliij, p. 246, 
where he speaks of the modes of the distribution of wealth as de- 
pendent on human will, and capable therefore of being modified by 
human effort. At the same time, a caution should be added against 
going too far in ascribing an optional or arbitrary character to the 
laws of the distribution of wealth. It must not, for instance, be 
supposed that the sovereign power, whether democratic or otherwise, 
can arbitrarily impose uj)on a people any principles of distribution it 
pleases, regardless of the operation of ordinary economic motives and 
of the economic habits and customs which have naturally grown up 
and established themselves in the community. 



44 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

extra-regarding motives are not in economic affairs as 
powerful or as constant in their operation as motives of 
a self-regarding character. Still they none the less do 
exercise an appreciable influence, and as the sense of 
social responsibility grows stronger and becomes more 
diffused their importance is likely to be increased^ 

It involves confusion of thought, however, to sup- 
[)0se that economic phenomena are for the above reason 
incapable of being studied positively, or that in our 
investigation of them we are necessarily bound to pass 
a judgment upon their moral worth. To recognise the 
influence, actual or potential, exerted by the economic 
ideals that men may frame for themselves is not the 
same thing as to discuss the objective validity of those 

1 When people talk about supply and demand, they sometimes 
forget that these are themselves i^henomena depending upon human 
will, and that among the changes which may lead to modifications 
in supplj' or demand are changes in moral conditions. This may 
be the case, for instance, it', because the public conscience has been 
touched, people will not purchase commodities which they believe 
to have been produced under what they regard as immoral con- 
ditions ; or if they will not deal with shops where the employers 
have the reputation of treating their employees meanly or harshly. 
The fact that, at any rate in the estimation of traders themselves, 
causes of this kind may operate to a very appreciable extent is shewn 
by the anxious indignation with which some large Loudon firms re- 
pudiated certain statements made before the Select Committee of the 
House of Lords on the Sweating System (1888) in regard to their 
manner of paying their workpeople. More than one firm specially 
called the attention of the Committee to the fact that they " were 
being damnified and injured in their business by reason of the state- 
ments which were being made before their lordships. " 



II.] INFLUENCE OF ECONOMIC IDEALS. 45 

f ideals; and our treatment of economic science may 
remain strictly positive (in the sense in which we are 
now using that term), while at the same time we enquire 
in detail in what ways economic phenomena are or 
may be affected by the pressure of public opinion, or 
by motives of justice, and kindliness, and concern for 
the general well-being. 

It has been argued that the science cannot be 
separated from the art of economics, because of the 
^ influence exerted by the latter upon the actual course 
I of economic development\ There is an element of 
truth in this argument, which has perhaps been 
sometimes overlooked ; but it does not establish the 
desired conclusion. Men are infl.uenced in what they ] 
actually do by what they think the}' ought to do; 
and economic precepts, when enforced by the agency 
of the law or public opinion, lead to modifications 
of economic facts. But all this may be taken into 
account without leaving the positive for the practical 
standpoint. Consider, for example, the influence exerted 
upon medieval trade by doctrines of the illegitimacy 
of usury and of what constitutes a reasonable price. 
It is one thing to study the nature and extent of this 
influence. It is another thing to enquire into the 
validity of the doctrines themselves. And although 

1 Compare Professor H. C. Adams in Science Economic Discussion, 
p. 102. 



46 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

the historian may more or less combine the two dis- 
cussions, they clearly admit of logical separation. 

We may conclude the argument contained in this 
section by the remark that, just as the science of 
ps3^chology recognises the existence and operation of 
moral motives, yet does not pass ethical judgments, 
so political economy may recognise the operation of 
moral motives in the economic world, and yet not 
become an ethical science. 

§ 3. Grounds for recognising a distinct positive 
science of 'political economy, the sole province oj which 
is to establish economic unifoi-mities. — Grantiug that it 
is logically possible to separate the positive from the 
ethical and practical study of economic phenomena, 
there is still no absolute inconsistency in holding that 
such a separation is undesirable. It may be pointed 
out how enormous is the influence exerted upon the 
well-being of mankind by the modes in which wealth is 
produced and distributed ; and stress may be laid upon 
the fact that those human activities, which constitute 
the subject-matter of the economist's investigations, 
have an ethical significance, which is at least as worthy 
of consideration as their economic significance. It is 
indeed not strange that the idea of an essentially 
ethical treatment of political economy should have 
a strong fascination for earnest minds. Nor is it 
strange that as our social sjnnpathies grow broader 



II.] POLITICAL ECONOMY AS A POSITIVE SCIENCE. 47 

and stronger, the notion of stopping short at the purely 
positive enquiry should be viewed with an increasing 
degree of impatience. 

But in all this the point really at issue is obscured. 
No one desires to stop short at the purely theoretical 
enquiry. It is universally agreed that in economics the 
positive investigation of facts is not an end in itself, 
but is to be used as the basis of a practical enquir}'^, 
in which' ethical considerations are allowed their due 
weight. The question is not whether the positive 
enquiry shall complete as well as form the foundation 
of all economic discussion, but whether it shall be syste- 
matically combined with ethical and practical enquiries, 
or pursued in the first instance independently. 

The latter of these alternatives is to be preferred 
on grounds of scientific expediency. Our work will 
be done more thoroughly, and both our theoretical and 
our practical conclusions will be the more trustworthy, 
if we are content to do one thing at a time. The 
following are, in rather more detail, the reasons that 
ma}^ be given for explicitly recognising the independ- 
ence of the positive enquiry \ 

1 The question of combining positive and ethical enquiries is a 
somewhat different one from that of combining enquiries that belong 
respectively to the de^sartments of science and art. The two questions 
have, however, a good deal in common, and we shall, therefore, in 
order to avoid unnecessary repetition, treat them together. The 
reader will observe that in the arguments that follow the undesirability 



48 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

(1) The attempt to fuse together enquiries as to' 
what is, and enquiries as to what ought to be, is likely 
to stand in the way of our giving clear and unbiassed 
answers to either set of questions. Our investigation, 
for instance, of the laws that determine competitive 
wages cannot but be seriously hampered, if the very 
same discussion is to serve for a solution of the problem 
whether wages so determined are fair wages. The value 
of economic theories is, indeed, rightly measured by their 
ultimate bearing on practical questions; and the econo- 
mist should always seek to direct his theoretical investi- 
gations into the channels that will eventually prove 
most useful from the practical standpoint. But while 
the ultimate aim may be to guide human conduct, 
the immediate object to be kept in view is knowledge 
of positive facts. Such knowledge is not likely to 
be accurate and thorough, if, instead of pui'suing 
his theoretical enquiries systematically, the economist 
works them out piecemeal, as they happen to rise into 
importance in connexion with particular practical issues. 
It may require an effort to keep the practical problems 
in the background even temporarily, but in the long 
run the guidance afforded will be the more trustworthy, 
if its scientific foundations are first made secure'. 

sometimes of the formei% and sometimes of the latter, combination is 
chiefly had in view. 

1 Bacon, in an often quoted passage, comments on the hasty and 
untimely eagerness with which men are apt to turn aside from pui'e 



II.] POLITICAL ECONOMY AS A POSITIVE SCIENCE. .49 

It may be added that since purely economic data 

rarely by themselves suffice for the complete solution 

of practical problems, either our solution of the latter 

will be incomplete, or else the discussion that belongs 

to the positive science of economics will not improbably 

be overlaid by the introduction of considerations which, 

so far as it is concerned, are extraneous \ 

science to its practical applications. "Whence it comes that, like 
Atalanta, they go aside to take up the golden apple, so meanwhile 
interrupting their course and letting victory slip out of their hands. 
But in the true course of experiment, and the carrying it on to new 
eii'ects, the Divine Wisdom and Order are entirely to be taken as our 
examples. Now God on the first day of Creation created only Light, 
and gave a whole day for that work, and on that day created no 
material object. Similarly, in experience of every kind, first the 
discovery of causes and true Axioms is to be made ; and light-bringing 
not fruit-bringing experiments to be sought for. But Axioms rightly 
discovered and established supply practical uses not scantily but in 
crowds ; and draw after themselves bands and troops of effects " 
{Novum Organum, Book i., Aph. 70). 

1 The importance of maintaining the strictly scientific standpoint 
in the academic study of political economy is insisted upon by 
Professor Dunbar as follows : " The investigation of economic law is 
a strictly scientific enquiry, as much as the investigation of the law of 
gravitation, and the determination of economic law falls within the 
competence of the university. Indeed, one of the great objects for 
which the university exists is to train minds for such enquiry and to 
further the advance of knowledge in precisely such obscure depart- 
ments. But on the mixed questions of legislative policy and expe- 
diency, it is not the province of the university to pronounce. They 
indeed involve questions of science, as they involve much else ; but 
their solution is not an act of the scientific judgment. It is, on the 
contrary, an act of the ijolitical judgment, enlightened by the aid of 
economic science, of jurisprudence, of the study of human nature 
itself, or whatever else may serve to clear up the matter in hand. 
The historical narratives in which the great questions of the past lie 

K. i 



50 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

(2) The attempt to combine theoretical and prac- 
tical enquiries tends to confirm the popular confusion 

I as to the nature of many economic truths. What are 
laid down as theorems of pure science are constantly 
interpreted as if they were maxims for practical 
guidance. In spite of repeated protests from economists 
themselves, there is an inveterate disposition on the 
part of the public to regard the principles of political 

I economy as essentially rules of conduct, even when 
the sole intention of those who formulate them is to 
determine what is, and not to prescribe what ought to 
be. Thus, because in economic theory men's action in 

j buying and selling is commonly assumed to be governed 
by self-interest, political economy is supposed to in- 
embedded are no doubt objects of university study, and the iinravel- 
ling of their tangled threads affords a valuable training, by means of 
a subject-matter of unfailing interest ; but it is no i^art of the business 
of the university to pronounce ex cathedra upon the policies which 
may find in such narratives some illustration, but which must after 
all rest upon indeterminate and probably transitory conditions. So, 
too, the great financial and industrial questions of the day supply the 
best of material for practice in the analysis of complicated problems 
and in the collecting and weighing of evidence ; but in all this it is 
the acquisition of power in the dealing with problems, and not the 
solution of any practical question, that is the real matter in hand. 
The iiniversity may, and if successful in its ti'ue functions will, 
supply scientific data for the use of all who are concerned in the 
settlement of legislative and administrative q-uestions ; but when to 
these data are added the many others which form a part of the basis 
for all practical decisions, the further declaration of opinion from the 
university chair becomes an obiter dictuvi, not necessary in the strict 
performance of duty, and raising some difficult questions of expe- 
diency" {Quarterly Journal of Economics, July 1891, p. 411). 



II.] CONFUSION BETWEEN LAWS AND PRECEPTS. 51 

I culcate selfishness ; because many economic truths are 

I based on the postulate of competition, trades-unions 
are spoken of as violating economic laws ; and because 
it is laid down that, in a perfect market, price is deter- 
mined by supply and demand, the science is represented 

1 as teaching that price ought so to be determined. 
This kind of .cojnfusioii is perhaps particularly common 
in_England where, for reasons that are to be found in 
the historical development of the science, political 
economy has to a large extent become identified in 
the public mind with the policy of laisser faire'^. 

In order to remove this prejudice, it is most desir- 
able that care should be taken to distinguish economic 
precepts from the theorems of the positive science upon 

\ which they are based. But if theoretical and practical 
enquiries are systematically merged together, the 
distinction can never be made thoroughly clear. More- 
over, if we profess that our treatment of the subject is 
throughout ethical, then where we do not blame we shall 
naturally be understood to approve, or at least to ex- 
cuse. Actually to express on every occasion an ethical 
judgment, and in so doing to strike always the true 
note, is an impossibility. It may be added that the 
moral character of economic phenomena varies even 
when their scientific character is the same. 

^ The connexion between political economy and the doctrine of 
laiaser faire is touched upon further in a noje at the conclusion of 
this chapter. 

4—2 



52 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

(3) There is a further reason why a positive science 
uf political economy should receive distinct and in- 
dependent recognition. With the advance of knowledge, 
it may be possible to come to a general agreement, in 
regard to what is or what may be in the economic 
world, sooner than any similar agreement is attainable 
in regard to the rules by which the economic activities 
of individuals and communities should be guided. The 
former requires only that there shall be unanimity 
as to facts ; the latter may be prevented by conflicting 
ideals, as well as by divergent views as to the actual 
or the possible^' Take, for instance, the problem of 
socialism versus individualism. Even if philosophers 
are agreed as to facts, they may still arrive at contrary 
solutions of this problem, because they differ as to the 
true ideal of human society, and as to the comparative 
importance to be assigned, say, to the realisation of 
individual freedom. 

If political economy regarded from the theoretical 
standpoint is to make good progress, it is essential that 
all extrinsic or premature sources of controversy should 
be eliminated ; and we may be sure that the more its 
principles are discussed independently of ethical and 
practical considerations, the sooner will the science 
emerge from the controversial stage. The intrusion 
of ethics into economics cannot but multiply and 
perpetuate sources of disagreement. For if an ethical 



II.] POLITICAL ECONOMY AS A POSITIVE SCIENCE. 53 

treatmeiit of economic problems is to be systematic 
and thorough, and not merely sentimental and super- 
ficial, fundamental ethical questions that have long 
been the subject of controversy cannot be excluded — 
such questions, for instance, as the determination of 
a standard of justice, and the relation of this standard to 
the ordinary utilitarian standard. However necessary 
it may be to face these questions at a later stage, there 
is no reason why we should not have a positive science 
of economics that is independent of them. 

In the following pages, then, it is this positive 
science that is meant by political econoviy when that 
term is used without further qualification \ 

At the same time, it does not follow that in pursuing 
his theoretical investigations, the economist need con- 

^ As a designation for the positive science, economics or economic 
science maybe preferred to political economy, as being less likely to be 
used ambiguously. The name 'political economy is, however, too firmly 
established to be altogether discarded ; and we, therefore, use all three 
of the names more or less indiscriminately. It is to be added that 
whatever ambiguity attaches to poUtical economy is beginning also to 
attach to the other terms. Dr Cunningham, for instance, in his 
Economics and Politics in the main understands by economics, and by 
economic science, a system of maxims. " Economic science," he 
says, " is wholly practical, it has no raison cfetre except as directing 
conduct towards a given end," namely, the pursuit of wealth ; and 
the principles of economics are accordingly described as practical 
prhiciples (such as are embodied in the mercantile system or in the 
system of laisser fa ire) which state the means to be pursued with 
reference to this end. On the use of the term economic politics, and 
for some farther observations on the general subject discussed in this 
section, compare the note on page 78. 



54 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

sider himself altogether precluded from indicating the 
ethical or practical significance of the theorems of fact 
which it is his primary object to formulate. An isola- 
tion of this kind is generally speaking impracticable. 
There are, indeed, some practical questions, especially 
in currency and banking, in whicii economic considera- 
tions are of such paramount importance, and the 
connexion between theory and practice is so immediate 
and obvious, that the refusal to consider at once the 
practical bearing of the theoretical discussion might 
seem to be unnecessarily pedantic, and to involve 
needless repetition. All that is meant is that if moral 
judgments are expressed, or practical applications 
pointed out, they should be regarded as digressions, not 
as economic dicta, constituting integral and essential 
portions of economic science itself In other words, 
the theoretical and practical enquiries should not be 
systematically combined, or merged in one another, as 
is maintained by those who declare that political 
economy is an indivisible whole of theoretical and 
practical investigations ^ 

1 Economists who take the stricter view of economic science have 
been criticised as inconsistent because after describing political 
economy as a positive science they generally go on to introduce into 
their own treatises a large number of ethical and practical pronounce- 
ments (compare Professor C. S. Devas on ' ' The Restoration of 
Economics to Ethics" in the International Journal of Ethics for 
January 1897). There is, however, no inconsistency, if it is made 
clear that such pronouncements are merely introduced incidentally 
by way of illustration and application, and if the writer never forgets 



II.] APPLICATIONS OF ECONOMIC THEOREMS. 55 

§ 4. Applied economics. — It is unnecessary to 
insist upon the enormous j3r.§!-gtic£|.l im.portange_of . the . 
theoretical knowledge that economic science affords. 
Industrial and financial policy can be rightly directed, 
only if based upon such knowledge ; and whether we 
seek to construct social ideals, or to decide upon ade- 
quate steps towards their attainment, an indispensable 
preliminary is a study of the economic consequences 
likely to result from varying economic conditions. 

The question may, therefore, be raised whether, 

granting the existence of an independent economic 

science, economists should not supplement their treat- 

I ment of this science by constructing a definite ai^t 

\ of political economy, in which maxims for practical 

guidance are explicitly formulated. 

In^sujaport of this view, it may be argued that if 
the economist is led to regard certain practical questions 
as definitely within his province, he is the more likely 
to direct his theoretical investigations into the most 
useful channels, so that they may ultimately become 
not only light-giving but also fruit-bearing. 

It may further be urged that by explicitly recog- 
nising the twofold character of political economy, while 
at the same time carefully distinguishing the stand- 
points from which it becomes a science and an art 

that his primary object is the investigation of facts. What we plead 
for is that there shall be no systematic combination of economics and 
ethics, and no ambiguity as to the natm-e of economic laws. 



56 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

respectively, we shall best remedy the popular mis- 
conception as to the true nature of economic laws\ 

Granting, however, the desirability of treating 
systematically the practical applications of economic 
science, it may be doubted whether the phrase «ri of 
'political eco7iomy does not suggest a body of doctrine, 
definite in scope and at the same time complete in 
itself, such as is really unattainable. The practical 
applications of economic theories are many and various ; 
and the precepts based upon a study of the science may 
vary, according as we take the individual, or the 
national, or the cosmopolitan point of view. Leaving 
this point on one side, a more serious difficulty results 
from the universally recognised fact that but few 
practical problems admit of complete solution on 
economic grounds alonaj It is true that in a few 
departments — such as those of currency and banking — 
we may meet with cases where, having determined the 
economic consequences of a given proposal, we practically 
have before us all the data requisite for a wise decision 
in regard to its adoption or rejection. But more usuall}' 
— when we pass, for instance, to problems of taxation, 
or to problems that concern the relations of the State 
with trade and industry, or to the general discussion 
of coinmunistic and socialistic schemes — it is far from 

1 This is one of the main grounds given by Professor Sidgwick for 
recognising a distinct wrt as well as a science of political economy 
(Princi2)les of Political Economij, 1901, p. 395), 



II.] SCOPE OF POLITICAL ECONOMY AS AN ART. 57 

being the case that economic considerations hold the 
field exclusively. Account must also be taken of ethical, 
social, and political considerations that lie outside the 
sphere of political economy regarded as a science. 

If, therefore, the art confines itself to the practical 
applications of the science, pure and simple, its precepts 
will necessarily lack finality. They cannot be more 
than conditional. At the same time, there is danger 
of their hypothetical character being forgotten, and 
of the idea consequently gaining currency, that the 
economist desires to subordinate all considerations that 
are not purely economic. 

If, on the other hand, the art attempts a complete 
solution of practical problems, it must of necessity 
be to a large extent non-economic in its character, 
and its scope becomes vague and ill-defined. It 
may, accordingly, be objected that in attempting to 
formulate an economic art, that shall lay down absolute 
rules for the regulation of human conduct, economists 
ai'e claiming to occupy too wide a range, and to frame 
a body of so-called economic doctrine, that is really 
much more than, economic, and cannot with any 
advantage be separated from general political and 
social philosophy \ 

1 The difficulty of assigning a definite scope to political economy, 
considered as an art, is discussed in further detail in a note at the 
conclusion of this chapter. 



58 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

The question of recognising a definite art of political 
economy is to a certain extent a verbal one ; and if all 
possible misunderstanding as to the scope of such an 
art and its relation to positive economic science can be 
removed, the way in which this question is decided is 
comparatively unimportant. On the whole, however, 
it seems likely, to conduce to clearness of thought to 
regard the branch of enquiry under consideration as 
I forming the economic side of political philosophy, or of 
Ithe art of legislation, or of social philosophy, as the 
lease may be, rather than as constituting a distinct art 
of political economy. In lieu of such an art, we should 
then recognise special departments of political and social 
philosophy, dealing with practical questions, in which 
economic considerations are of material importance, for 
the discussion of which, therefore, economic knowledge 
is essential, and to the treatment of which economists 
will naturally turn their attention. Adopting this 
alternative, we may still sum up the more important 
practical applications of economic science under the 
name applied economics. This term has the special 
merit that it does not suggest a definite body of 
principles with scientifically demarcated limits\ 

1 It must be pointeil out, however, that the uarae cqjplu'd economics 
is also not altogether free from ambiguity. For a science may be 
applied in two ways : first, to the explanation of i^articular facts ; 
secondly, to afford guidance in matters of conduct. The term 
applied economics or applied political economy has indeed been 



II.] APPLIED ECONOMICS. 59 

We may also, if we please, speak of certain of the 
practical enquiries under consideration, as the art of 
industrial legislation, the art of taxation or of State 
finance, and so on. To these phrases there seems to 

emijloyed in three different senses : (a) in the sense suggested in the 
text; (6) to designate tlie application of economic theory to the 
interpretation and explanation of particular 'economic phenomena, 
without any necessary reference, however, to the solution of practical 
questions ; (c) to mark off the more concrete and specialized portions 
of economic doctrine from those more abstract doctrines that are held 
to pervade all economic reasoning. Compare the following : 

(a) " Applied political economy studies economic phenomena 
with the immediate aim of providing safe rules for administration, or 
of directing economic institutions so that they may conduce to the 
general welfare. Its aim is therefore immediately practical, since it 
does not investigate the lioio or why of certain facts, but seeks rules 
for doing certain things well." — Cossa, Guide to the Study of Political 
Economy, First English Edition, Part i, Chapter 2. Compare also 
Cornewall Lewis's division of politics into j^we and applied {Methods 
of Observation and Reasoning in Politics, Chapter 3, § 5). 

(/)) " The following essays consist in part of attempts to apply 
the principles of economic science to the solution of actual problems, 
of which those presented by the Californian and Australian gold 
discoveries, and by the state of land tenure in Ireland, are the 
most important. So much of the volume may not improperly be 
described as essays in applied political economy. The remaining 
essays deal mostly with topics of a theoretical kind." — Cairnes, 
Essays in Political Economy theoretical and applied, Preface. Under 
the name applied political economy, both kinds of applications noted 
above are here had in view. 

(c) " Currency, banking, the relations of labour and capital, those 
of landlord and tenant, pauperism, taxation, and finance are some of 
the principal portions of applied political economy, all involving the 
same ultimate laws, manifested in most diiferent circumstances." — 
Jevons on The Future of Political Economy. Applied economics in 
this last sense constitutes what may be called the concrete, as dis- 
tinguished from the abstract, portion of economic science itself. 



60 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

be no objection. In each case we have a distinct 
and fairly compact body of doctrine, and there is no. 
implication that our data are exclusively economic. 
For the notion of one supreme art of political economy, 
we should thus substitute a series of arts, in each 
of which there is a limitation to some particular 
sphere of economic activity. 

§ 5. Political economy and ethics. — The relation 
between political economy and ethics may now be 
stated more explicitly, although this will involve 
little more than a repetition of what has been already 
indicated. We have seen that since men's economic 
activities are determined partly by moral considerations^ 
it may be necessary in positive economic science to 
take account of the operation of moral motives. It 
is not, however, the function of the science to pass 
ethical judgments ; and political economy, regarded 
as a positive science, may, therefore, be said to be 
independent of ethics. 

But it is a different matter when we turn to the 
applications of economic science to practice, that is, 
to applied economics ; for no solution of a practical 
problem, isolating to human conduct, can be regarded as 
, complete, until its ethical aspects have been considered. 
It is clear, accordingly, that practical discussions of an 
economic character cannot be isolated from ethics, 
except in so far as the aim is mereh^ to point out the 



II.] ETHICS OF POLITICAL ECONOMY. 61 

practical bearing of economic facts, without any attempt 
to lay down absolute rules of conduct. It may be 
added that although in the past there may have been a 
tendency with a certain school of economists to attempt 
the solution of practical economic questions without 
adequate recognition of their ethical aspects, there is, 
at the present time, no such tendency discernible 
amongst economists who have any claim to speak with 
authority. 

Here, then, is the third of those subdivisions of 
economic enquiry in the widest sense, which we began 
by distinguishing from one another. In logical order, 
this division stands intermediate between the two 
others — between the positive science, that is to say, 
and the so-called art. It may be regarded as a branch 
1 of applied ethics, and may perhaps be called the ethics 
of political economy. In it the functions of the 
economist and the moralist are combined, the general 
principles of social morality being considered in their 
special bearing on economic activities \ 

In pursuing this enquiry, our object is scientifically 
to define inen's duties in their economic relations 



1 A distinction may be drawn between the public and the private 
ethics of political economy. As an illustration of doctrines belonging 
to the latter categorj^, attention may be called to a volume of sermons 
by Mr W. Eichmond entitled Christian Economics. Compare also 
Dr Cunningham on the Ethics of Money Investment in the Economic 
Revieiu for January 1891. 



62 POLITICAL ECONOMY AND PRACTICE. [CHA"?. 

one with another, and, above all, the duties of society, 
in so far as it can by its action control or modify 
economic conditions. In other words, we seek to 
determine staudards, whereby judgment may be passed 
on those economic activities, whose character and 
consequences have been established by our previous 
investigation of economic facts. We seek, moreover, 
to determine ideals in regard to the production and 
the distribution of wealth, so as best to satisfy the 
demands of justice and morality. It is subsequently 
the function of applied economics, or of the so-called 
art of political economy, to enquire how nearly the 
ideal is cajjable of being attained, and by what 
means ; and to determine how, subject to the above 
condition, the greatest aggregate happiness may be 
made to result from the least expenditure of efFortj 
As an illustration, it may be pointed out that 
the many problems laised by medieval moralists, in 
connexion with the question as to what constitutes a 
just price, belong to the ethics of political economy. 
For instance, — Is it right to sell a thing for more than 
it is worth ? Is it right to sell a thing which is not 
of the substance or measure or t[uality it professes to 
be ? Is the seller bound to reveal a fault in an 
article ? Is it right in trade to buy cheap and sell 
• dear ? The modern doctrine that, under a system of 
thoroughgoing competition, normal value is determined 



II.] ETHICS OF POLITICAL ECONOMY. 63 

by cost of production is, on the other hand, a doctrine 
that belongs to positive science. The true solution 
of the ethical question, as to what constitutes a just 
price, may of course be held to be that competitive 
price will be a just price, if only it can be guaranteed 
that the competition is really free and effective on 
the part of all concerned. Or it may be held that, v 
while this is not an ideally just price, no juster price 
is practically attainable. But these doctrines are in 
no way implied in the ordinary doctrine of cost of 
production as the regulator of normal value. 

I 6. Methodological importance of the distinctions 
indicated in tliis chapter. — We may conclude the present 
chapter by briefly pointing out the methodological 
importance of the distinctions that have been indicated. 
The main point to notice is that the endeavour' to 
merge questions of what ought to be with questions 
of what is tends to confuse, not only economic dis- 
cussions themselves, but also discussions about economic 
method. The relative value to be attached to different 
methods of investigation is very different, according as 
we take the ethical and practical standpoint, or the 
purely scientific standpoint. Thus it would be generally 
agreed that, in dealing with practical questions, an 
abstract method of treatment avails less and carries us 
much less far than when we are dealing with theoretical 
questions. In other words, in dealing with the former 



64 POLITICAL ECONOMY AND PRACTICE. [CHAP. 

class of questions, we are to a greater extent dependent 
upon history and inductive generalization. 

Again, while economic uniformities and economic 
precepts are both, in many cases, relative to particular 
states of society, the general relativity of the latter 
may be affirmed with less qualiHcation than that of the 
former. " Political economy," says Sir James Steuart, 
and by this he means the art of political economy, 

' " in each country must necessarily be different " ; and, 
so far as practical t[uestions are concerned, this is 
hardly too strong a statement. On such questions 
there is nearly always something to be said on both 
sides, so that practical decisions can be arrived at only 
by weighing counter-arguments one against another. 
But the relative force of these arguments is almost 
certain to vary with varying conditions. Hence, in 

I general, a given economic policy can be definitely 
formulated only for nations having particular economic 
surroundings, and having reached a cei'tain stage of 
economic development. Applied to nations not simi- 
larly situated, the policy is likely at least to require 
modification. It is even possible that what is excellent 
for a given nation at a given time may be actively 
mischievous and injurious for another nation, or for the 
same nation at a different period of its economic 
history. It follows, similarly, that the value of the 
economic institutions of the past cannot adequately be 



II.] RELATIVITY OF ECONOMIC PRECEPTS. 65 

judged by reference to existing conditions alone. We 
are not here denying the relativity of economic 
theorems, but merely affirming the greater relativity 
of economic precepts. Unless the distinction between 
theorems and precepts is carefully borne in mind, the 
, relativity of the former is lik-ely to be over-stated. 

It is because differences of this kind are ofben over- 
looked that divergences of view on questions of method 
become exaggerated. In the controversies that ensue, 
one set of disputants is thinking mainly of theoretical 
problems, while the other set is thinking mainly of 
practical problems ; and hence each in turn is liable to 
commit the fallacy of ignoratio elenchi. 

Again, because economics is regarded as wholly 
practical, some writers have been led erroneously to 
deny that any economic doctrines admit of definite or 
exact expression. It is implied that the study cannot 
yield anything more than a useful collection of rules, 
having a restricted validity and application, and subject 
to numerous limitations and exceptions. Even if it 
be granted that this description is not altogether in- 
applicable to political economy conceived as an art, it 
is obviously a fallacy to assume, without having made 
any clear distinction between them, that what is true of 
economic precepts is equally true of economic theorems. 
The frequency of errors such as these must be our 
excuse for treating in so much detail the distinctions 
, K. 5 



66 POLITICAL ECONOMY AND PRACTICE. [CHAP. 11. 

indicated in the present chapter. The chapters that 
follow relate almost exclusively to the scope of political 
economy conceived as a positive science, and to the 
methods whereby the theorems of this science are to be 
established. 



NOTES TO CHAPTER II. 

A. On Political Economy and Laisser Faire. 

The connexion between political economy and laisser 
faire may be discussed from two different points of view, 
which are not always as clearly distinguished as they should 
be. There is, first, the connexion between political eco- 
nomy and laisser faire considered as an assumption or 
basis of reasoning ; there is, secoridLy, the connexion be- 
tween political economy and laisser faire considered as a 
maxim or rule of conduct. 

(1) Abstract economic doctrines are for the most part 
based upon the assumption of free competition and absence 
of government interference. This assumption may indeed be 
said to have occupied a central position in the development 
of economic theories during the last hundred and twenty 
years. There are two reasons why this has been so. One 
is to be found in the general principle of reasoning that it 
is best to take the simplest cases first. If we can accurately 
determine what will ensiie under conditions of economic 
freedom, we shall be the better able to deal subsequently 
with more complicated cases, and to estimate the influence 
exerted by various interfering agencies. The second reason 
is that iu modern economic societies laisser Jaire has been 

5—2 



68 POLITICAL ECONOMY [CHAP. II. 

as a matter of fact the genei'al rule. Conclusions, there- 
fore, based on the assumption of non-interference have 
more nearly corresponded with the actual facts of modern 
industry than any conclusions obtained from other equally 
simple hypotheses could have done. 

Beyond this, however, there is no essentially necessary 
connexion between political economy and laisser /aire 
regarded as a basis of reasoning. Economists recognise 
that in certain states of society, actual or possible, the 
conditions are so diflFerent from those of modern industry 
that conclusions depending on the hj'pothesis of non- 
intei'ference are not even approximately applicable. More- 
over, in relation to modern economic phenomena themselves, 
it becomes necessary ultimately to deal with more complex 
problems in which various interferences with thorough- 
going competition have to be taken into account. The 
assumption of laisser faire represents, therefore, only a 
preliminary stage, and by its aid we traverse only a portion 
of the ground that has to be covered in the course of our 
economic reasonings. 

A little reflection will shew that it is far from being the 
case that political economy always presupposes the absence 
of government interference. It investigates the effects of 
export and import duties, of bounties, and of state-created 
monopolies — such as the opium monopoly in Bengal. It 
seeks to determine the influence exerted on wages by the 
existence of poor relief guaranteed by the State. In nearly 
all modern currency discussions — as, for instance, those 
relating to bimetallism or the regulation of convertible paper 
currencies — the whole argument is so far from being based 
on the assumption of laisser faire, that everything turns on 



NOTE A.] AND LAISSER FAIBE. 69 

the supposition that some control over the currency is 
exercised by governments. In short, wherever government 
intervention becomes a prominent factor, the economist 
recognises and discusses the influence exerted by it ; and if 
in the future the part played by the State in economic 
affairs is extended, account will have to be taken of the 
fact in current political economy. 

A contrast is sometimes drawn between a socialistic 
and an economic state of society ; but when the distinction 
is thus expi'essed, the term economic is not used in the 
sense given to it by economists themselves. It is true that 
in a purely communistic society a good deal of ordinary 
economic theory relating to distribution and exchange 
would be irrelevant or inapplicable. But although in 
such a society men's economic activities would be in cer- 
tain directions controlled, they would clearly not be anni- 
hilated ; and a scientific discussion of economic phenomena 
would, therefore, be by no means unnecessary. The func- 
tions of capital and the manner of its co-opei'ation with 
labour would, for example, still require elucidation. Cost 
of production would still admit of analysis, and we should 
still have the phenomena of increasing and diminishing 
returns. We should indeed still have the phenomenon of 
rent, meaning thereby the difference between cost of pro- 
duction under more favourable and under less favourable 
circumstances. 

Schemes of socialism, moreover, as distinguished from 
pure communism, do not necessarily involve the entire 
abolition of free exchange. Under such schemes, therefore, 
a theory of exchange would still be required. And unless 
our socialistic community were isolated from all others, 



70 POLITICAL ECONOMY [CHAP. II. 

there would still remain for discussion extremely complicated 
questions of foreign trade and international exchanges. 

We may be sure, finally, that if some of the old eco- 
nomic phenomena were to become obsolete, new ones would 
arise demanding scientific treatment. 

While then a contrast may be drawn between our 
current political economy in so far as it is specially 
designed to elucidate the existing economic order, and the 
form that the science would be likely to assume in so far 
as specially designed to elucidate the phenomena of a 
socialistic society, it is clearly erroneous to imagine that 
the triumph of socialism would mean the extinction of 
political economy as a science. 

(2) We may pass to a consideration of the connexion 
between political economy and laisser /aire regarded as a 
maxim of conduct. The question is quite distinct from that 
which we have just been discussing. For it is clear that 
we may on the one hand work out the consequences of 
laisser /aire with the very object of discrediting it as a 
practical principle ; or that we may on the other hand 
recognise the necessity of investigating the economic effects 
of government interference, while deploring the fact that 
instances of such interference are ever to be met with. 

Nevertheless the questions are not unfrequently con- ' 
fused together, and because laisser /aire is a common 
economic postulate it is supposed to be a necessary . 
economic precept. This confusion of thought has been 
encouraged by the circumstance that, until comparatively 
recently, the leading modem writers on the science have 
in their practical teaching expressly advocated a general 
policy of non-interference with trade and industry. Hence, 



NOTE A.] AND LAISSER FAIRE. 71 

starting with the conception of political economy as the 

I genei^al art of legislation in matters relating to wealth, the 

I public have come to identify it with the particular system 

. of I'educing government interference to a minimum ; and 

the maxim of natural liberty — that everyone should be 

left free to use his mind, his body, and his property in 

the manner he deems best for himself — is often regarded as 

the fundamental economic axiom. 

) Political economy being thus transformed into a dog- 

/ matic creed, the worth of the study itself is measured 

by the degree of acceptance accorded to this creed. So 

common is the identification of political economy with 

the principle of non-interference that rarely do we 

I find any professed attack on the former that does not on 

' analysis resolve itself mainly into an attack on the latter. 

Compare, for instance, Dr Hutchison Stirling's vigorous 

diatribe in his Secret of Hegel^. Similarly, when people 

talk about political economy being exploded and becoming 

a thing of the past, all the}^ mean is that laisser faire is 

ceasing to be an accepted maxim. On reflection it is clear 

j that there is an inherent absurdity in attacking 2^olitical 

< economy as distinct from any particular system of political 

economy. For if particular systems are exploded, that 

only necessitates their being replaced by some other 

system. 

Regarding political economy as a positive science, it 

j is of course clear that neither laisser faire nor any other 

maxim of conduct can form an integral portion of its 

.. teaching. Hence the advocacy of a policy of laisser faire 

1 Volume 2, pp. 569, ff. Compare, also, Carlyle's various attacks 
upon political economy. 



72 POLITICAL ECONOMY [CHAP. II. 

by individual economists, based though it may be on their 
interpretation of economic truths, belongs at any rate to 
applied economics. It has been said above that the leading 
English economists have in their practical writings been as 
a rule in favour of laisser /aire. Looking a little closer, 
however, we find that their advocacy of the principle is at 
any rate accompanied by numerous qualifications and excep- 
tions. They do not regard it as an axiomatic and inexorable 
formula by which all particular proposals may be finally 
tested, but as a practical conclusion whose validity in 
every case depends on particular circumstances \ 

Adam Smith, for example, holds that besides maintain- 
ing such public institutions as are necessary for defence 
and the administration of justice, it is the duty of govern- 
ments to maintain certain institutions for facilitating com- 
merce and pi'omoting education. " The third and last 
duty of the sovereign or commonwealth," he remarks, " is 
that of erecting and maintaining those public institutions 
and those public works, which though they may be in the 
highest degree advantageous to a great society, are, how- 
ever, of such a nature, that the profit could never repay 
the expense to any individual, or small number of indi- 
viduals ; and which it, therefore, cannot be expected tliat 
any individual, or small number of individuals, should 
erect or maintain." He moreover admits exceptions to a 

1 "Let ns remember," says Cairnes, "that lahser faire is b, prac- 
tical rule, and not a doctrine of science ; a rule in the main sound, 
but like most other sound practical rules, liable to numerous excep- 
tions ; above all, a rule which must never for a moment be allowed 
to stand in the way of the candid consideration of any promising 
proposal of social or industrial reform " (Essays in Political Economy, 
p. 251). 



NOTE A.] AND LAISSER FAIRE. 73 

policy of free trade ; for he explicitly recognises certain 
cases in which protection to native industry is desirable, 
and other cases in which it may rightly be a matter of 
deliberation " how far it is projDer to continue the free 
importation of certain foreign goods," or " how far, or in 
what manner, it may be proper to restore that free im- 
portation, after it has been for some time interrupted." 
There are other instances in which he justifies interference. 
" The law," he says, " which obliges the masters in several 
different trades to pay their workmen in money, and not in 
goods, is quite just and equitable." Again, while allowing 
that any regulations affecting the note issues of a country 
may be regarded as "in some respect a violation of natural 
liberty," he nevertheless considers that certain regulations 
of the kind may be justified on the ground that "those 
exertions of the natural liberty of a few individuals, which 
might endanger the security of the whole society, ai^e, and 
ought to be, restrained by the laws of all governments ; of 
the most free, as well as of the most despotical.'" 

Turning to Malthus, we find in the ranks of leading 
English economists a defender of the corn laws. Ricardo 
indeed touched only to a small extent on the economic 
functions of the State ; but M'^Culloch, who is usually 

1 On Adam Smith's attitude towards laisserfaire, compare Sidgvvick, 
Scope and Method of Economic Science, pp. 5 — 7. "To attribute to 
Adam Smith," says Dr Sidgwick, " a dogmatic theory of the natural 
right of the individual to absolute industrial independence — as some 
recent German writers are disposed to do — is to construct the history 
of economic doctrines from one's inner consciousness." Compare, 
also, Professor Nicholson's edition of the Wealth of Nati07is, Intro- 
ductory Essay, pp. 14 — 18, and Rae, Contemporary Socialism, 1891, 
pp. 353—359. 



74 POLITICAL ECONOMY AND LAISSER FAIRE. [CHAP. IT. 

looked upon as one of the nai-rowest of E.icardo's disciples, 
definitely advocated government interference in certain 
directions^ and J. S. Mill's long list of exceptions to the rule 
of laisserfaire is well known. Coming to quite recent writers 
there is still less justification for the notion of an essential 
and necessary connexion between political economy and the 
principle of non-interference. One of the distinguishing 
marks of a powerful school of economists at the present 
time is the definite repudiation of this principle ; and even 
those, who find in the study of economics most weighty 
arguments against protective and against socialist legisla- 
tion, would still never think of setting up the acceptance 
of a policy of unrestricted freedom of trade and industry as 
a test of economic orthodoxy. 



B. On the Scope of Political Economy 

CONSIDERED AS AN ArT. 

Some of the difficulties, which arise iia the endeavour to 
determine the scope of political economy considered as an 
art, have Vjeen l)riefly indicated in tlie preceding chapter. 
In this note they will be discussed in somewhat further 
detail. Questions may be raised in regard to, fii-st, the 
range of well-being contemplated by the art ; and, secondly, 
the precise nature of the ideal at which it aims. 

(1) Under the first of the above heads it may be asked 
whether the aim of the economic art is individual or social ; 
and whether it is national or cosmopolitan. 

1 For au eoiuneration of instances in which M^'Culloch regarded 
State intervention t'avourahly, see Eae, op. cit., pp. 360 — 372. 



NOTE B.] SCOPE OF POLITICAL ECONOMY AS AN ART. 7-5 

(a) It is clear that individuals as well as societies may 
in their own interests ttirn to account their study of 
economic science. The monopolist may derive practical 
guidance from the treatment of monopoly-value ; the 
manufacturer from the discussion of over-production and 
industrial depression ; the banker from the enquiry into 
the conditions under which crises tend to become periodic ; 
the trades-unionist from the analysis of the conditions 
favourable to the success of a strike. We might, accord- 
ingly, recognise a branch of the economic art, concerned 
with the principles according to which private persons 
should be guided in the pursuit of their own eeonomic 
interests. There are, moreover, technical arts, such as the 
art of banking, which are to some extent based on economic 
science, but whose aim cannot be described as social. 

It is, however, generally agreed by those who advocate 
the recognition of an art of political economy that it aims 
at some result that is desirable, not merely from the 
point of view of any given individual, but from the point 
of view of society taken as a whole. It is. not regarded as 
an art of getting rich, or as an art of speculation, or as an 
art of investment, or as professing to indicate how producers 
should organize and carry on their business, in order to 
make their profits as great as possible. The art of political 
economy is, in other words, not identified with the whole of 
the practical applications of economic science'. 

1 A minor question may here be raised, namely, whether in so far 
as the aim of the economic art is social, it is concerned wholly with 
legislation. M. de Laveleye defines political economy as determining 
"what laws men ought to adopt in order that they may, with the least 
possible exertion, procure the greatest abundance of things useful 
for the satisfaction of their wants ; may distribute them justly, and 



76 SCOPE OF POLITICAL ECONOMY [CHAP. II. 

(b) Assuming that the aim of the economic art is social, 
, not individual, the further question may be asked, whether 
it aims merely at national prosperity and national greatness, 
or at some result that is desirable for the whole human 
race. This point is suggested by List's distinction between 
jyolitical economy and cosinopolitical economy. He regards 
the former as limiting its teaching to " the enquiry how a 
given 7iation can obtain (under the existing conditions of 
the world) prosperity, civilization, and power, by means of 
agriculture, industry, and commerce " ; while the latter 
" teaches how the entire human race may attain pros- 
perity." ' 

consume them rationally" {Elements of Political Economy, § 2). The 
departments of economic practice here had in view are clearly of the 
utmost importance ; and there may be good grounds for giving a 
separate recognition to what may be called the art of State finance, 
and the art of industrial legislation. The former of these would in- 
clude a discussion of the general principles of taxation and of national 
debts from the practical standpoint. The latter would enquire how 
far and in what manner any State regulation of trade and industry is 
to be recommended. The art of political economy is, however, more 
usually regarded as having a wider scope than either of these. It 
may, for instance, in the matter of private almsgiving claim in the 
interests of society to formulate maxims for individual guidance ; or, 
with a view to the more equitable distribution of wealth, it may advo- 
cate the voluntary adoption of the co-operative principle or of profit- 
sharing ; or, accepting as its function a high moral task, it may seek 
in various ways to influence the economic activities of individuals so 
as to bring them into harmony with sound economic morality and 
secure the supremacy of right habits and customs in industrial life. 

1 llie National System of Political Economy (Sampson Lloyd's 
translation), p. 119. It is recognised by other economists besides 
List — including some distinctly free trade economists — that the general 
problem of free trade and protection needs to be handled somewhat 
differently according as the national or the cosmopolitan standpoint 
is adopted, 



NOTE B.] AS AN ART. 77 

It is true that cases of conflict between the precepts of 
tlie two arts here indicated are not likely to be frequent. 
But if it is maintained that no real conflict can ever occur, 
attention may be called to certain problems connected with 
emigration and immigration, and with export and import 
duties. J. S. Mill points out cases in which it is possible for 
a country to gain at the expense of other countries by the 
imposition of export duties. The opium trade between India 
and China afibrds an actual instance in which a country 
raises a large revenue from foreigners by means of what is 
practically a tax on exports. " It is certain, however," 
Mill adds, taking the cosmopolitan standpoint, " that what- 
ever we gain is lost by somebody else, and there is the 
expense of the collection besides : if international morality, 
therefore, were rightly understood and acted upon, such 
taxes, as being contrary to the universal weal, would not 
exist." ' Further, in reference to the question of restricting 
the exportation of machinery, Mill observes that even if 
by such means a country might individually gain, the policy 
would still in his opinion be unjustifiable on the score of 
international morality. "It is evidently," he says, "the 
common interest of all nations that each of them should 
abstain from every measure by which the aggregate wealth 
of the commercial world would be diminished, although of 
this smaller sum total it might thereby be enabled to attract 
to itself a larger share. "^ 

Since then a conflict is sometimes possible, it behoves 
the exponent of the economic art to make clear his view as 
to what the aim of the art really is. Perhaps the most 

^ Unsettled Questions of Political Economy, p. 25. 
2 Op, cit., p. 31. 



78 SCOPE OF POLITICAL ECONOMY [CHAP. II. 

obvious, solution is to recognise, as List suggests, two distinct 
arts — an art of cosniopoliian economy, and an art of national 
economy. The precepts of the former might often require 
modification to suit the special circumstances of different 
nations, but it would be cosmopolitan in the sense that it 
would have regard to the well-being of the greatest number, 
irrespective of nationality. The latter would deliberately 
sacrifice the intei'ests of other nations, if they happened 
to be in conflict with those of the nation specially under 
consideration. 

(2) A more fundamental question in regard to the 
scope of political economy considered as an art relates to 
the nature of the ideal at which it aims, (a) Does it seek 
merely to point out the laws, and institutions, and eco- 
nomic liabits, that are most favourable to the production 
and accumulation of wealth 1 (b) Or does it enquire 
further by what means an ideally just distribution of 
wealth may be attained ? (c) Or does it widen its range 
still further, and ask how all economic activities both of 
the State and of individuals should be moulded, with a 
view to the general well-being in the fullest and broadest 
sense 1 This last alternative represents the prevailing view 
amongst German econoinists^ 

1 The first of the three enquu'ies indicated iu this paragraph is 
sometimes spoken of as economic politics, and the third as social 
politics. Compare Pierson, Principles of Economics, Introduction, § 1 . 
Dr Pierson himself holds that a clear boundary line can be drawn 
between economics and social politics, but not between economics and 
economic politics. Indeed he defines economics as " the science which 
teaches us what rules mankind should observe in order to advance 
in material prosperity." His main grounds for refusing to recognise 
any distinction between economic politics and economics itself are 
that the object of the study of economics is to throw light on questions 



NOTE B.] AS AN ART. 79 

(a) If the end at which the art of political economy 
aims is simply the increased production of wealth, its scope 
is certainly definite, and the data upon which its conclu- 
sions are based belong exclusively to economic science. 
Since, however, the production of wealth is not the sole 
or supreme end that a society will have in view in framing 
its laws and shaping its institutions, the economic art so 
conceived can lay down no absolute or final rules. It can 
only speak conditionally, and say that in so far as the in- 
creased production or accumulation of wealth is concerned, 
such and such a line of action should be adopted. Hence, 
before deciding to act upon the hypothetical precepts of 
political economy (so interpreted), it is necessary to enquire 
how far they are consistent with other social aims, and how 

of a practical nature, and that the precepts of economic politics are 
nothing more than a recapitulation of the conclusions arrived at by 
economics conceived as a positive science. At the same time, Dr Pierson 
admits that the precepts of economics are always of a conditional nature. 
The argument in the preceding chapter has been partly directed against 
identifying economics with social politics, and so far we are in agree- 
ment with Dr Pierson. But we have also argued against his view of 
the scope of economics whereby economics and economic politics are 
identified. It may be added that although there are some cases in 
which the difference between the uniformities of economic science and 
the precepts of so-called economic politics may not unfairly be 
described as a mere difference between statements in the indicative 
mood and statements in the imperative, there are others in which the 
theoretical statements do not admit of being immediately transformed 
into corresponding imperatives. This applies to the most funda- 
mental principles of economics, such as the laws determining market 
and normal value, the law of rent, the principles determining the 
value of money, and so on. Even in such an enquiry as the inci- 
dence of a given tax, the result cannot, generally speaking, be 
immediately made the basis of an imperative. This seems decisive 
as against defining economics as a system of rules of conduct. 



80 SCOPE OF POLITICAL ECONOMY [CHAP. II. 

far they satisfy the claims of justice. Wherever there is 
conflict, an appeal must be made to some other and higher 
authority. This authority must determine to what extent 

I each set of considerations shall be subordinated to the 

; others. 

It seems a doubtful gain to construct a definite art of 
political economy in this sense. For inasmuch as the 
science of economics itself contains all the information that 
is requisite, it will suffice to call attention to the practical 
bearing of its theorems, without systematically converting 
them into precepts. To frame a definite system of precepts, 
having regard entirely to the increased production of wealth, 
can indeed hardly fail to give rise to misapprehension. As 
a matter of fact, political economy has not unfrequently 
been subjected to startling misrepresentations, because it 
has first been identified with the art of making wealth a 
maximum, and then the necessarily hypothetical character 
of such an art has been forgotten. It is of little use to 
protest that economic precepts are not necessarily to be 
acted upon. If we have once formulated maxims of policy, 
and proclaimed that economic principles are directly prac- 
tical, the impression that economists desire to subordinate 
all considerations to the increase of wealth will certainly 
be encouraged. If, however, it can be made clear that eco- 
nomic principles are in themselves positive, and that, whilst 
economics shews, amongst other things, how laws and 
institutions influence the production and accumulation of 

( wealth, still it does not itself base any rules of action upon 
such knowledge, but merely places the results of its investi- 
gations at the service of the legislator and the social 
reformer, to be by them duly weighed and considered, then 



NOTE B.] AS AN ART. 81 

the chance of such misapprehension will at any rate be 
I'educed to a minimum. 

(b) According to Professor Sidgwick, "we may take 
the subject of political economy considered as an art to in- 
clude, besides the theory of provision for governmental ex- 
penditure, (1) the art of making the propoi'tion of produce 
to population a maximum, ...and (2) the art of rightly 
distributing produce among members of the community, 
whether on any principle of equity or justice, or on the 
economic principle of making the whole produce as useful 
as possible."' This conception of the economic art is 
broader than that discussed above. But it seems to go 
either too far or else not quite far enough. For we pass 
outside the boundary of economic considerations in the 
narrowest sense, taking account also of considerations of 
justice ; and yet our maxims will still be, in some cases, 
only conditional. They cannot claim to be absolute, until 
we have taken into account all classes of considerations 
that may in any way be pertinent. In framing maxims 
i of taxation tyid State finance, for example, political and 
! social aims have to be borne in mind as well as equitable 
j and strictly economic aims. The same may be said of free 
' trade or protectionist maxims. Again, in seeking to deter- 
mine what is the ideal distribution of wealth, we ought to 
consider not merely the relation of distribution to desert, 
but also the manner in which methods of distribution affect 
the various other elements of social well-being. The indi- 
• vidualistic organization of industry is by some writers con- 
demned on the ground of the anti-social spirit engendered 
b}'^ the competitive struggle. On the other hand, the so- 
^ Principles of Political Economy, 1901, p. 397. 
K. 6 



82 SCOPE OF POLITICAL ECONOMY [CHAP. XL 

I cialistic organization of industry is by a different set of 
( writers condemned on the ground that it hinders the reali- 
1 zation of individual freedom, and the development of indi- 
vidual character. Both these arguments are independent 
of the effect of socialism and individualism on the produc- 
tion and distribution of wealth. 

(c) According to the third conception of the economic 
art, its aim is to direct the economic activities of the 
\ State and of individuals, with a view to the completest 
I realization of social well-being. "Political economy," says 
Professor Schonberg, representing the view of the dominant 
German school, as well as his own view, " does not ask 
primai'ily whether the greatest possible amount of wealth is 
produced, but rather how men live, how far through their 
economic activity the moral aims of life are fulfilled, and 
how far the demands of justice, humanity, and morality are 
satisfied."^ Professor Ely, taking a similar view, and 
writing on behalf of the so-called "new school" of economists 
in the United States, describes the ideal of political economy 
as "the most perfect development of all human faculties in 
each individidual, which can be attained." The aim, he goes 
on to say, is " such a production, and such a distribution, of 
economic goods as must in the highest practicable degree 
subserve the end and purpose of human existence for all 
members of society."" The end had in view is now the 
supreme end for which a society exists, and every question 
that arises is to be considered from all sides, and not from 
a single point of view. The rules laid down will accord- 
ingly be no longer conditional, but absolute, at any rate in 

1 Handbueh dcr poUtischen Oekonomie, Die Volksuu rthschaft , § 9. 
■^ Science Ecoiumiic Discussion, p. 50- 



NOTE B.] AS AN ART. 83 

relation to the particular country or state of civilization 
under discussion. 

The above corresponds with the attitude that the great 
majority of economists of all schools have at least desired 
to take, so far as they have attempted a complete solution 
of practical problems for social purposes. The conception 
seems, moreover, to raise the economist to a position of 
greater importance than he can occupy, so long as he limits 
himself to purely theoretical investigations or merely con- 
ditional precepts. But does he not herein become a good 
deal more than an economist? He will certainly need for 
his scientific basis very much more than economic science 
can by itself aflford, for he must be a student of political 
and social science in the widest sense. He must also solve 
fundamental problems of social morality. We have, in 
fact, no exception to the general rule that arts, claiming to 
lay down absolute rules, cannot be based exclusively on 
single theoretical sciences. 

We are, accordingly, led to the conclusion, indicated in 
the preceding chapter, that a definitive art of political 
economy, which attempts to lay down absolute rules for 
the regulation of human conduct, will have vaguely defined 
limits, and be largely non-economic in character. 



6—2 



CHAPTER III. 

ON THE CHARACTER AND DEFINITION OF POLITICAL 
ECONOMY REGARDED AS A POSITIVE SCIENCE. 

I 1. Political economy and physical science. — 
Inasmuch as the production of material wealtli is 
dependent largely upon physical conditions, it may 
be asked whether political economy does not partake 
to some extent of the nature of physical science. This 
question is, however, to be answered in the negative, 
on the ground that while the science lias to take 
account of the operation of physical laws, it is still 
concerned with them only indirectly ; such laws do 
not constitute its subject-matter. It does not, for 
instance, seek to establish or explain the physical 
laws that are involved in agriculture or mining or 
manufacture. This is the function of such sciences 
as mechanics, chemistry, geology, and the science of 
agriculture. The only concern of political economy 
with these laws is that it assumes certain of them as 
premisses or data, and makes them the basis of its 



CH. III.] POLITICAL ECONOMY AND PHYSICAL SCIENCE. 85 

own reasonings, tracing the influence which they 
exert in moulding and modifying men's economic 
activities. Thus even the law of diminishing return 
from land, regarded as a bare physical fact, is hardly 
to be considered a true economic law, although it 
no doubt occupies a unique position amongst the 
phj^sical prolegomena of economic science. Its eco- 
nomic importance consists in its relation to the 
productiveness of human labour as applied to land, 
and in its consequent influence upon the distribution 
and exchange of wealth. If economists are led into 
giving fuller details about agriculture than they usually 
give about processes of manufacture, it is because, 
from this point of view, the importance of the above 
law is exceptionally great. 

The relation of political economy to the physical 
sciences is then simply this, that it presupposes them ; 
it is sometimes concerned with physical laws as pre- 
misses, but never as conclusions. 

Accordingly when the production of wealth is said 
to be one of the great departments of economic science, 
reference is made primarily to what may be called 
I the social laws of the production of wealth (i.e., to the 
'various influences exerted on production by division of 
labour, foreign trade, methods of distribution, and so 
forth), rather than to the physical processes by whose 
aid production is carried on. The physical requisites 



86 POLITICAL ECONOMY AND PHYSICAL SCIENCE. [CHAP. 

of the production of wealth need to be summarised 
in their broadest outlines; but the science is not 
directly concerned with the technique of different 
trades and occupations. Again, whilst economists 
recognise the physical conditions affecting men's 
economic efficiency, the immediate effects of these 
conditions are accepted as facts from physiology and 
other sciences ; it is only in so far as they indirectly 
affect or are affected by the social facts of wealth 
that economic science itself investigates them. 

The differentia of economic laws, as contrasted 
with purely physical laws, consists in the fact that the 
former imply voluntary human action^ The forces of 
competition are, indeed, sometimes spoken of as if 
they were themselves mechanical and automatic in 
their operation. But, as we have already had occasion 
to remark, this is not the case. When, for instance, we 
speak of the price of a commodity as determined by 
supply and demand, we mean by supply not the total 
amount in existence, but the amount offered for sale 
by holders of the commodity ; and it is clear that in 

1 " Various laws of nature have to be considered in connexion with 
human economy, but these are not economic laws. By the latter we 
understand laws of economic facts. An economic fact is not a pheno- 
menon of the natural, material world. It originates when in some 
way man, as an intelligent being with free will, enters actively into 
co-operation with natural phenomena, for the purpose of satisfying 
human needs." — Schiinberg, Hamlhuch der polithchen Oekonomie, Die 
Folkswirthscliaft, § IB. 



in.] POLITICAL ECONOMY AND PSYCHOLOGY. 87 

this sense supply, equally with demand, is dependent 
upon human judgment and will. 

§ 2. Political economy and •psychology. — In order to 
mark off political economy from the physical sciences, 
it is spoken of sometimes as a moral science, sometimes 
as a social science. Of these descriptions, the latter is 
to be preferred. The term moral science is, to begin 
with, 'not free from ambiguity. This term is no doubt 
sometimes uised in a broad sense as including all the 
separate sciences that treat of man in his subjective 
capacity, that is, as a being who feels, thinks, and wills. 
But more frequently it is used as a_synonym for ethics ; 
and hence to speak of economic science as a moral 
science is likely to obscure its positive character^ 

But the above is not the only reason why it is 
better not to describe political economy simply as 
a moral science. The sciences that relate to man fall 
into two subdivisions — those that are concerned with 
man in his purely individual capacity, and those that 
are concerned with him principally as a member of 
society. Political economy belongs to the latter of 
these subdivisions. It is true that some of the problems 
discussed by the science — those relating, for example, 
to the functions of capital — would arise in a more 
or less rudimentary form in relation to an isolated 

^ Compare what- has been said in the preceding chapter as to the 
relation of political economy to ethics. 



!S8 POLITICAL ECONOMY AND PSYCHOLOGY. [CHAP. 

individual ; and it is accordingly possible:! to illustrate 
certain elementary economic principles by reference to 
the conduct .of a Robinson Crusoe. As soon, however, 
as we advance beyond the threshold of the science, 
it becomes necessary to regard human beings, not in 
isolation, but as members of associated communities 
including others besides themselves. The most pro- 
minent characteristic of actual economic life is the 
relation of mutual dependence that subsists between 
different individuals ; and political economy may be 
said to be essentially concerned with economic life as 
a special aspect of social life. 

Political economy should then be described as a 
social, rather than as a moral or psychological, science. 
I It presupposes psychology just as it presupposes the 
I physical sciences, and the natural starting point for 
the economist in his more abstract enquiries is a 
consideration of the motives by which individuals are 
usually influenced in their economic relations ; but the 
science is not therefore a branch of psychology. The 
bare facts that other things being equal men prefer a 
greater to a smaller gain, that under certain conditions 
they will forego present for the sake of future gratiti- 
cations, and the like, are psychological facts of great 
economic importance. But they are assumed by the 
economist, not established by him. He does not seek to 
explain or analyse them ; nor does lie investigate all the 



III.] POLITICAL ECONOMY AND PSYCBOLOGY. 89 

consequences to which they lead. Economic laws in 
the strict sense are different from the above. They are 
not simple laws of human nature, but laws of complex 
social facts resulting from simple laws of human 
I nature. An illustration may be quoted from Cairnes. 
" Rent," he observes, " is a complex phenomenon, arising 
from the play of human interests when brought into 
contact with the actual physical conditions of the soil 
in relation to the physiological character of vegetable 
j)roductions. The political economist does not attempt 
to explain the physical laws on which the qualities 
of the soil depend ; and no more does he undertake to 
analyse the nature of those feelings of self-interest in 
the minds of the landlord and tenant which regulate 
the terms of the bargain. He regards them both 
as facts, not to be analysed and explained, but to be 
ascertained and taken account of; not as the subject- 
matter, but as the basis of his reasonings. If further 
information be desired, recourse must be had to other 
sciences : the physical fact he hands over to the chemist 
or the physiologist ; the mental to the psychological 
or the ethical scholar."^ 

No doubt the relation of political economy to 
psychology is more intimate than its relation to the 
physical sciences, and this is perhaps not sufficiently 
realised in the passage just quoted from Cairnes. The 

1 Logical Method of Political Economy, pp. 37, 8. 



90 POLITICAL ECONOMY AND PSYCHOLOGY. [CHAP. 

fact that social, rather than purely psychological, 
phenomena constitute the subject-matter of political 
economy is, however, clear if we take any recognised 
work on the science, such as the Wealth of Nations. 
Adam Smith traces many of the phenomena of wealth 
^ to man's mental constitution, but it is not man's 

mental coustitution that it is his purpose to analyse. 
This is not always sufficiently borne in mind when 
the Wealth of Nations is contrasted with the Theory 
of Morat Sentiments, and spoken of as forming its 
supplement. 

J. S. Mill, indeed, in speaking of political economy 
uses the phrase " moral or psychological science " ; and 
V he goes on to define political economy as " the science 
relating to the moral or psychological laws of the pro- 
duction and distribution of wealth."^ Take, however, 
the following laws as formulated by Mill himself in his 
. Pi'inciples of Political Economy : rent does not enter 

into the cost of production of agricultural produce ; 
the value of money depends, ceteris paribus, on its 
quantity together with the rapidity of circulation ; a 
tax on all commodities would fall on profits. Such laws 
as these ought certainly not to be described as moral 
or psychological, even if it be granted that they rest 
ultimately upon a psychological basis. 

Moreover, as will be shewn in the following cliapter, 
1 Unsettled Questions of Political Economy, pp. 129, 133. 



III.] POLITICAL ECONOMY AND PSYCHOLOGY. 91 

notwithstanding the importance of psychological pre- 
misses in certain departments of economic enquiry, 
the phenomena of the industrial world cannot be ex- 
plained in their entirety simply by deductive reasoning 
from a few elementary laws of human nature. To 
what purpose, and subject to what conditions, political 
economy uses its psychological data will be considered 
later on ; it need only be said at this point that 
reasoning from such data requires to be supplemented 
in various ways by direct observation of the complex 
social facts which constitute economic life\ 

1 It may be remarked in passing that the description of economics 
adopted by Jevons in his Theory of Political Economy seems to give 
the science too much of a psychological, and too little of a social, 
character. The theory of economics is described as ' ' the mechanics 
of utility and self-interest" (p. 23); it is " entirely based on a calculus 
of pleasure and pain ; and the object of economics is to maximise 
happiness by purchasing pleasure, as it were, at the lowest cost of 
pain" (p. 25). A few pages further on the same idea is expanded. 
"Pleasure and pain are undoubtedly the ultimate objects of the cal- 
culus of economics. To satisfy our wants to the utmost with the 
least effort — to procure the greatest amount of what is desirable 
at the expense of the least that is undesirable — in other words, to 
maximise pleasure, is the problem of economics" (p. 40). The outcome 
of Jevons's conception of a calculus of pleasure and pain is a theory of 
utility, whose economic importance it would be difScult to exaggerate. 
Still this theory does not itself constitute the central theory of eco- 
nomics. It should indeed be regarded as an essential datum or basis 
of economic reasonings, rather than as itself an integral portion of 
the science at all. It seems more properly to belong to a branch of 
applied psychology, to which the name hedonics may be given. At 
the same time, because of its economic importance, the economist 
must work out the theory for himself, if he does not find it worked 
out independently. Thus accidentally as it were, it may occupy an 



92 POLITICAL ECONOMY AND POLITICS. [CHAP. 

§ 3. Political econortiy a social as distinguished 
from a political science. — From whatever point of view 
we look at it, political economy is best described as 
a social science ; and if a distinction is drawn between 
social and political sciences, it must, notwithstanding 
its name, be regarded as belonging to the former, and 
not to the latter, categor}^^ For while the science 
has sometimes to take account of political and legal 

J conditions, it is essentially concerned with man in his 
social as distinguished from his political relations. It is, 
in other words, only in certain departments of political 
economy that we are concerned with men in their 
special character as members of a State. As remarked 
by Knies, " a large preliminary division of political 
economy has to investigate only the social economic 
life of man independently of all political influences."- 

J The laws of distribution and exchange under conditions 

of free contract may be taken as an example. These 

important place in economic writings, and yet be a premiss rather 
than an ultimate conclusion of the science. Jevons himself, after 
laying down his theory of utility, goes on to consider its applications 
to what are economic phenomena in the strictest sense. He thus 
throws so much light upon these phenomena that his Theory of 
Political Economy, taken as a whole, may rightly he regarded as one 
of the most suggestive and valuable contributions to the science that 
have ever been made. 

1 Hence a further reason, besides the one given in the note on 
p. 53, why some recent writers prefer to speak of the science as 
economics rather than as iwUtical economy. 

2 Die Politische Ockonomic vom geschichtlichen Standpwikte, 
1883, p. 3. 



til] political economy and politics. 93 

laws do not exhaust political economy, but at any rate 
they fill a large and fundamentally important place in 
the science. Again, whilst economic doctrines may be 
in some cases relative to particular political conditions, 
they are more frequently relative to particular stages 
of industrial organization that are to a considerable 
extent, if not altogether, independent of political in- 
fluences. 

The above remarks relate primarily to the positive 
science of economics. Regarding political economy 
in its practical aspect, the connexion with politics is 
more intimate. Applied economics may indeed be said 
to be mainly concerned with the economic activities of 
the State in its corporate capacity, or of individuals as 
controlled by the State. Still, as we have already had 
occasion to shew, economic maxims — having for their 
object the interests of society as a whole — may also 
be formulated for the guidance of individuals acting 
independently of external constraints 

§ 4. Definitions of Wealth and Economic Activity. — 
The point has now been reached at which it seems de- 
sirable to give a formal definition of political economy, 
regarded as a positive science ; but before doing 
this, it is necessary briefly to discuss the meaning 
of certain terms which we have already had occasion 
frequently to make use of, namely, the terms wealth 
1 Compare Chapter 2, Note B. 



94 DEFINITION OF WEALTH. [CHAP. 

and economic activity. Wealth is one of those words 
that may without disadvantage be defined somewhat 
differently from different points of view ; and it must 
be borne in mind that our present object is merely to 
give a definition that shall suffice broadly to distinguish 
economic enquiries from those relating to other human 
interests. No attempt need, therefore, be made to 
deal with the difficulties that arise in connexion with 
the measurement of wealth. 

Utility may be defined as the power of satisfying, 
directly or indirectly, human needs and desires ; and 
the possession of utility is the one characteristic that all 
writers are agreed in ascribing to wealth. It seems clear, 
however, that we cannot from our present standpoint 
identify wealth with all sources of utility whatsoever, 
since there are many means of satisfying human needs, 
such as family affection, the esteem of acquaintances, 
a good conscience, a cultured taste, which have never 
been included within the scope of political economy, 
and the laws of whose production and distribution have 
hardly anything in common with the laws that are 
as a matter of fact discussed b}^ economists. Some 
characteristic besides the possession of utility must 
therefore be added, whereby such sources of utility as 
consist in a man's own nature, or in the subjective 
attitude of others towards him, may be excluded 
from the wealth category. This further characteristic 



III.] 



DEFINITION OF WEALTH. 



95 



may be found in t he quality of being potpjitiaUji 
exchangea.blg. It is not meant that nothing is wealth 
unless it is actually bought and sold. For a thing may 
be potentially exchangeable without being actually 
made the subject of exchange. Even in a communistic 
societ}^ the criterion would be applicable. It is true 
that with special reference to such a society, it might 
more naturally be expressed in another form, the 
essential characteristic of wealth being described as the_ 
capability of being distributed by fiat of government. 
The sources of utility capable of being thus distributed 
would, however, be identical with those that could in 
a state of economic freedom be acquired by purchase. 
In either case- jiarsnn al qualities. and _ _such ob jects of 
j^psj^T-p fl.s fl.fpAntimi and ps^'^ em, would be excluded. 

Wealth may then be defined as consisting of all 
potentially exchangeable means of satisfying human 
needs \ 



^ Professor Marshall defines wealth as including "all those things, 
external to a man, which (i) belong to him, and do not belong equally 
to his neighbours, and therefore are distinctly his ; and (ii) which are 
directly capable of a money measure, — a measure that represents on 
the one side the efforts and sacrifices by which they have been called 
into existence, and, on the other, the wants which they satisfy " 
(Principles of Economics, vol. i., 1895, p. 127). This definition corre- 
sponds broadly with that given in the text. For, on the one hand, 
things must be capable of appropriation, in order that they may be 
potentially exchangeable ; and, on the other hand, potential exchange- 
ability is a necessary and sufficient condition, in order that things 
may be directly capable of a money measure. It should be added 



96 DEFINITION OF WEALTH. [CHAP. 

This definition brings within the category of wealth, 
in the first place, desirable material commodities that 
are capable of appropriation, such as food, books, 
buildings, machines ; in the second place, rights and 
opportunities to use or receive or in any way derive 
benefit from material commodities, such as mortgages 
and other debts, shares in public and private companies, 
patents and copyrights, access to libraries and picture- 
galleries, and the like ; in the third place, personal 
services not resulting in any material product, as, for 
example, those rendered by actors, soldiers, domestic 
servants, lawyers, physicians ; and, lastly, the right to 
command or control- the services of any person over 
a given period. 

In regard to services it is to be observed that 

although the benefits they confer may be more or less 

permanent, they are in themselves merely transient 

phenomena. They are, however, the produce of labour; 

they admit of being made the subject of exchange ; 

and they ma}' possess exchange- valued They give 

that whilst emphasis may conveniently be laid o n. exchantreabiljJ ^v for 
pin-poses of definition, other of the characteristics of wealth become 
more prominent in certain departments of economic science. For 
instance, in the department of production, the primary notion is that 
wealth is the result of labour and sacrifice. Again, in the department 
of distribution, the right of approjjriation needs more explicit recog- 
nition. Compare Professor Nicholson's article on Wealth in the ninth 
edition of the Encyclopaedia Britannica. 

1 When a material commodity is sold or given away, its ownership 
is transferred from one person to another. When, however, a service 



II[.] DEFINITION OF WEALTH. 97 

rise, therefore, to problems analogous to those Avhicli 
present themselves in connexion with material wealth ; 
and they are accordingly rightly included under wealth 
from our present stand-point \ 

is rendered, nothing passes into the possession of one person that 
was previously in the possession of another ; and hence it has been 
denied that services can possibly be exchanged. But it is a mistake 
to suppose that change of ownership either constitutes exchange or 
is essential to it. On the one hand, material commodities may 
change ownership gratuitously ; and, on the other hand, we have all 
that is really essential to exchange, when A confers a benefit upon B 
on the understanding that B confers some other specified benefit upon 
him, and vice versa. Either benefit thus conferred may consist in 
the possession of some material commodity ; but it may also consist 
in a service rendered, that is, in an expenditure of effort on the one 
side accompanied by the satisfaction of some actual or supposed need 
on the other. It is, therefore, quite correct to say that a service may 
be rendered in exchange for another service, or in exchange for a 
material commodity ; and it is quite correct to speak of services as 
having exchange- value. 

1 It is sometimes considered essential to the idea of wealth that 
it shall be susceptible of accumulation ; and in speaking of services 
as wealth there is no doubt some departure from the ordinary usage of 
language. It is also true that, in certain connexions, whatever is not 
susceptible of accumulation may be left out of account in the estima- 
tion of wealth. But, on the other hand, as Dr Sidgwick observes, "in 
ordinary estimates of the aggregate income of the inhabitants of a 
country, directly useful — or, as we might say, 'consumable' — services 
are commonly included : for as such services are reckoned as paid out 
of income, if we add the nominal incomes, estimated in money, of 
those who render such services as well as those who receive them, the 
result will only represent the aggregate real income of the country, if 
this latter notion is extended so as to include services " {Principles of 
Political Economy, 1901, p. 88). The following passage, from a 
journal of high standing specially devoted to economic questions, 
may serve as an example of the kind of inaccuracy to which the 
omission of services from the category of consumable wealth may 

K. 7 



98 DEFINITION OF WEALTH. [CHAP. 

It will be noticed that the above definition excludes 
flora the category of wealth personal abilities and 
attainments of all kinds. For abilities and attainments 
are not in themselves capable of being made the subject 
of exchange. We sometimes indeed speak of paying 
for the use of a man's skill ; but in reality the payment 
is for services rendered by aid of the skill. The right 
to command the services of any one over a given period 
is included under wealth, as pointed out above. 

The exclusion of human qualities and capacities 
from the wealth category is on the whole in accordance 
with scientific convenience, as well as with popular 
thought and speech, which — as Professor J. B. Clark 
observes — broadly distinguishes between the able man 
and the wealthy man, between what a man is and 

give rise. " What come.s out most strongly upon a review of the 
distribution of wealth is the smallness of the portion which is even 
theoretically available for redressing apparent inequality. It is only a 
small part of a wealthy man's riches which can actually be taken from 
himself, because it is after all but a small part which he actually con- 
sumes himself. The greater part is only his in so far as he directs the 
iriode of spending or employing it. He directly maintains a number 
of persons who might conceivably be more usefully employed than in 
lounging in his hall, attending to his horses, or cultivating his flowers, 
but who are maintained, nevertheless, out of his wealth. Nearly the 
whole of his incoine goes in paying directly or indirectly for labour, 
and to take it from him means a general dislocation of the whole 
apparatus." This passage, if not actually erroneous, is at least very 
misleading. In addition to the material wealth that the rich man 
consumes, he enjoys a multiplicity of services which, under other 
conditions, might be distributed more equally through the com- 
munity. 



III.] DEFINITION OF WEALTH. 99 

what he has\ At the same time, it is important to 
recognise that labour expended in the acquirement 
of skill is indirectly productive of wealth, in so far 
as it ultimately results either in the production of 
material commodities or in the performance of useful 
services. Thus, labour expended in acquiring the skill 
of the actor or the doctor is productive, as well as 
that expended in acquiring the skill of the carpenter 
or the shoemaker. Moreover, in any correct estimate 
of the productive resources of a country, the natural 
and acquired abilities of its inhabitants may occupy 
a position of the greatest importance. 

It may be added that the scope of political economy 
is practically not affected by the question whether 
wealth is limited to exchangeable sources of utility, as 
in the above definition, or is used in a broader sense so 
as to include under the title of personal wealth all those 
capacities that enable men to be efficient producers of 
exchangeable wealth. For although so-called personal 
wealth does not, under the former alternative, directly 
constitute part of the subject-matter of the science, it 
still comes in for discussion as a source of wealth, and 
as such has still to be recognised as an economic factor 
of vital consequence. 

Wealth being defined as above, economic activity 
may be correspondingly defined as human activity which 

1 Philosoplnj of Wealth, i^p. 5, 6. 

7 — 2 

LofC. 



TOO DEFINITION OF ECONOMIC ACTIVITY. [CHAP. 

directs itself towards the production and appropriation 
of such means of satisfying human needs as are capable 
of being made the subject of exchange. The economic 
life of a community is constituted by the economic 
activities of the members of which it is composed, 
acting either in their individual or in their corporate 
capacity. The term economy is sometimes used as 
equivalent to economic life, and by national economy is 
meant accordingly the economic life of a nation. It 
is to be observed that as civilisation advances, each 
individual becomes more and more dependent on others 
for the satisfaction of his needs ; and hence economic 
life increases in complexity. In other words, with the 
progress of society, the organization of industry and 
the distribution of industrial functions grow increasingly 
complicated, and the phenomena resulting from men's 
economic activities become more and more varied in 
character. 

§ 5. Definition of Political Economy. — Political 
economy, regarded as a positive science, is often briefly 
defined as^he science of the phenomena of wealth •,J 
and this definition has the merit of directness and 
simplicity. There seems, however, some advantage 
in attempting so to define the study as explicitly to 
indicate that it is not primarily concerned with either 
physical or psychological or political phenomena as 
such, but with phenomena that originate in the 



III.] DEFrNITION OF POLITICAL ECONOMY. 101 

activity of human beings in their social relations one 
with another. 

With the object of making this clear, political 
economy may be defined as the science which treats ^O 
of the phenomena arising out of the economic activities / 
of mankind in society. 

It is not pretended that this or any other definition 
can by itself suffice unambiguously to express the nature 
of economics. The proposed formula must, therefore, 
be taken subject to the various explanations that have 
been already given, or that may subsequently be given, 
in regard to the province of the science, and its 
relations to other branches of enquiry. It may be 
said of the definition of political economy, as of most 
other definitions, that the discussion leading up to it 
is of more importance than the particular formula 
ultimately selected. 



NOTE TO CHAPTER III. 
On the Interdependence of Economic Phenomena. 

The phenomena with wliich political economy is con- 
cerned are usually classitied under the heads of the pro- 
duction, distril)ution, exchange, and consumption of wealth. 
This separation of the science into distinct departments 
should not, however, be regarded as absolute or essential. 
The object of the classification is convenience of exposition ; 
but such is the action and reaction between the phenomena 
in question, that it is impossible satisfactorily and com- 
pletely to discuss any one of the departments without 
having regard to the others also. 

Taking, for instance, production and consumption, it is 
•obvious that men's habitual consumption determines what 
kinds of wealth shall be produced ; and, as indicated in 
the distinction between j^roductive and unproductive con- 
sumption, the form in which wealth is consumed materially 
affects the amount i^roduced. It is not quite so obvious, 
but it is equally true, that the production of wealth, both 
in kind and amount, is influenced by its distribution. The 
very rich consume luxuries, which, if wealth were more 
equally distributed, would in all probability not be produced 
at all or at any rate not to the same extent. Again, if 



NOTI';.] PRODUCTION OF WEALTH. 103 

wealth were more equally distributed, there would in all 
probability be an increase in the average efficiency of the 
previously worst paid classes of the community, either in 
consequence of their being better fed, housed, and clothed, 
or in consequence of a better education and training 
having been provided for them by their parents • on the 
other hand, the number of hours during which they would 
be willing to work might be diminished. That the amount 
of wealth produced would in some such ways as these be 
affected by changes in distribution seems practically certain ; 
although it is impossible to say a jjriori in what direction 
the effect would predominate. 

Turning to the connexion between production and 
exchange, it is to be obser^ ed that, as soon as division of 
labour is carried at all far, the former involves in some form 
or other the latter. Those whose function may prima facie 
appear to be simply and entirely to facilitate the exchange 
of wealth — for example, bankers and bill-brokers, whole- 
sale merchants and retail dealers — all play their part, and 
sometimes an important part, in assisting in the production 
of wealth. For without exchange in some form or other it 
is obvious that production could be carried but a very little 
way ; and, strictly speaking, the work of production ought 
not to be considered complete, until commodities have 
found their way into the possession of those persons whose 
intention it is to consume them'. In the case of exchange 

1 J. S. Mill in his treatment of production introduces, under the 
head of capital, questions of distribution that might perhaps have 
been avoided. In his fundamental propositions respecting capital, 
and especially in the much criticized proposition that demand for 
commodities is not demand for labour, the truth of his conclusions 



104 DISTRIBUTION AND EXCHANGE. [OHAP. III. 

and consumption, there is a still more intimate connexion ; 
for rates of exchange depend fundamentally upon laws of 
demand, and these in their turn depend dii-ectl}' upon laws 
of consumption. 

The connexion between distribution and exchange may 
be discussed fx-om more than one point of view. If it is 
asked how the distribution of wealth is effected under 
modern industrial conditions, the answer clearly is by 
means of exchange. As it has been well expressed, 
" the adjustment of rates of exchange constitutes, in the 
aggregate, the process of distribution.'" We may go even 
further, and say that in an individualistic society the 
theor}' of distribution resolves itself immediately into a 
theory of exchange-value. Each share into which the net 
produce of a community is divided represents the price 
paid for a certain service or utility afforded by the recipient 
of that share. Wages may thus be regarded as the ex- 
change-value of labour, interest as the exchange-value of 
the use of capital, rent as the exchange- value of the use 
of land^. 

From another point of view, the theory of the exchange- 
value of material commodities depends upon the theory of 
distribution. At any rate, as Cliffe Leslie insists, the 
theory of cost of production involves the whole theory of 

depends partlj' upon the assumption of the perfect mobihty of capital 
and labour. But that is a subject that comes in for explicit discussion 
only in connexion with distribution, and much later in Mill's work. 
Here is perhaps one reason why Mill's chapters on capital are by 
some readers found so difficult, and, it may be added, unsatisfactory. 

1 J. B. Clark, Philosophy of Wealth, p. 64. 

2 Compare Sidgwick, Principles of Political Economy, 1901, 
p. 176. 



NOTE.] CONSUMPTION OF WEALTH. 105 

wages and profits ; for unless we have already determined 
a law of normal wages and a law of normal profits, the 
doctrine of cost of production is meaningless. 

It is, therefore, clear that theories of distribution and 
exchange cannot be divorced from one another, or discussed 
to any purpose in isolation. 

In connexion with the intei'dependence of economic 
phenomena, we may touch briefly upon a controversy that 
has been raised as to whether the consumption of wealth 
should or should not be regarded as constituting a distinct 
department of political economy'. The question is to a 
large extent one of convenience of arrangement, rather 
than of actual divergence of view in regard to the scope of 
the science. 

The following are among the topics, in addition to an 
analysis of the nature of economic consumption, that have 
been treated by different economists under the head of the 
consumption of wealth : the theory of utility, and the 
relation betweenutility and value"; the distinction between 

1 It may be observed that the consumption of wealth, in the sense 
in which the term is used by the economist, does not of necessity in- 
volve its destruction. We may say that by the consumption of wealth 
in political economy we mean its utilization, to which its destruction 
may or may not be incidental. Thus, in the economic sense, jewels 
are in process of consumption when they are being worn as ornaments ; 
so are the houses in which we live, and the pictures that hang on our 
walls. A house in which no one lives, or a picture. that is stowed 
away in a lumber room, lasts at any rate no longer than one that 
is being rationally "consumed." Compare ^enioic, Political Economy, 
p. 54 ; and Walker, Political Economy, % 328. Senior remarks that 
' ' it would be an improvement in the language of political economy if 
the expression 'to use' could be substituted for that 'to consume.' " 

- Compare Jevons, Theory of Political Economy. General Walker 
is of opinion that what has led to the practical excision of the whole 



106 CONSUMPTION OF WEALTH. [CHAP. III. 

different kinds of consumption, and in particular the 
distinction between productive and unproductive con- 
sumption^; the effects of different kinds of consumption, 
and in particular the effects of luxury'-^: the policy of 

department of consumption from so many recent works is " the 
fascination of the mathematical treatment of economical questions, 
and the amhition to make political economy an exact science " (Poli- 
tical Economy, p. 298). We can hardly regard this view as correct; 
for, if we take Jevons, who has insisted more strongly than any other 
Englii-h economist on the mathematical nature of the science, we 
find his most characteristic doctrines distinctly hased on a theory of 
utility, which theory of utility he himself rightly regards as a theory 
of consumption. Indeed he lays it down explicitly that " the theory 
of economics must begin with a correct theory of consumption " 
{Theory of Folitical Economy, 1879, p. 43). Elsewhere he declares 
that the doctrine of consumption is the most important branch of the 
science, and he regards it as unaccountable and quite paradoxical 
that English economists should, with few exceptions, have ignored 
that doctrine. See Fortnightly Review, vol. 26, p. 625. Professor 
Walras of Lausanne, who is another representative mathematical 
economist, takes up jjractically the same position as Jevons. A con- 
sideration of the satisfaction of needs, which must involve a theory of 
consumption, is the basis of his doctrine of exchange-value. See his 
Elements d^Econoiiiie Politique Pure. 

1 Compare J.-B. Say, Traite d'Economie Politique; James Mill, 
Elemoits of Political Economy ; M^CuUoch, Principles of Political 
Economy ; Roscher, Grundlagen dcr Nationalokonomie ; E. de Lave- 
leye. Elements de V Economic Politique ; Leroy-Beaulieu, Precis 
d'Economie Politique; Lexis, Die volksivirthschaftliche Consumtion, 
in Schonbei'g's Handbuch der politischen Oelionomie. 

2 Compare Say, M'^^CuUoch, Eoscher, de Laveleye, Leroy-Beaulieu, 
Lexis. M'^Culloch, in his treatment of the consumption of wealth, 
brings out incidentally, but clearly, a point often supposed to be over- 
looked by economists, namely, that a taste for luxuries tends to in- 
crease, not to diminish, the amount of wealth iDroduced. "The mere 
necessaries of life may, in favourable situations, be obtained with 
but little labour ; and the uncivilised tribes that have no desire to 
possess its comforts are pi'overbially indolent and poor, and are 



4 



NOTE.] CONSUMPTION OF WEALTH. 107 

sumptuary laws, and of other ]av/s attempting to regulate 
consumption'; the causes of commercial depression, and 
the impossibility of general over-production"; insurance 

exposed in bad years to the greatest privations. To make men 
industrious — to make them shake oft' that lethargy which benumbs 
tlieir faculties when in a rude or degraded condition, they must 
be inspired with a taste for comforts, luxuries, and enjoyments " 
{Principles of Political Economy, p. 493). Cliffe Leslie goes a little 
too far in the same direction, when he remarks that unproductive 
expenditure and consumption "are the ultimate incentives to all 
production, and without habits of considerable superfluous expendi- 
ture a nation would be reduced to destitution " {Essays, 1888, p. 170). 
Men produce in the first place in order that they may live, and con- 
sumption which sustains a worker in efficient working condition is 
not usually spoken of as unproductive. Cournot {Principes de la 
Theorie des Richesses, § 31) points out that we can conceive a state 
of society in which there would be no such thing as strictly unpro- 
ductive consumption ; for every satisfaction given to animal appe- 
tites might tend either to the preservation of health, the increase 
of strength, the prolongation of existence, or the propagation of the 
species. General Walker under the head of consumption exposes 
the fallacy that the mere destruction of wealth in some way increases 
production. This fallacy may be regarded as in a way the comple- 
mentary error of the true theory that a taste for luxuries and a high 
standard of comfort do, under certain conditions, tend to increase 
productive efficiency. 

1 Compare M<=Culloch, Roscher, and Lexis. Professor Lexis dis- 
cusses the danger of the supply of certain commodities becoming 
exhausted {e.g., coal, petroleum, quicksilver), and touches on the 
policy of restraining in some way their consumption with the object 
of protecting the interests of future generations. He touches also 
upon interferences with consumption based on climatic, sanitary, 
and moral considerations; e.g., restrictions upon the destruction of 
forests, regulations in regard to house accommodation for the labour- 
ing classes, restrictions upon the consumjation of alcohol. 

- Compare James Mill, Roscher, Lexis, and Walker. Tliis topic 
is treated under the head of consumption, because it relates to the 
equilibrium between production and consumption. Professor Lexis 



108 CONSUMPTION OF WEAl/PH. [CHAP. III. 

and its economic advantages' ; government expenditure and 
the theory of taxation^; the doctrine of population, and in 
particular the existence of economic wants and a standard 
of comfort as affecting the increase of population^ 

It is easy to shew that most of the above topics may 
quite naturally be dealt with in other departments of the 
science, as in fact they are by those economists who do not 
profess to treat explicitly of the consumption of wealth. 
The distinction, for instance, between productive and unpro- 
ductive consumption, and the efi'ects generally of different 
forms of consumption on ])roduction, are not inappropriately 
discussed under the head of production itself; while the 
phenomena of (actual or apparent) over-production may be 
taken in connexion with the theory of exchange, since only 

goes on to touch upon possible remedies or palliatives for trade crises, 
such as State undertakings of which the main object is to provide 
work for the unemployed, and emigration. 

1 Compare Roscher, and de Laveleye. 

^ This topic is brought under the head of the consumption of 
wealth by Say, James Mill, de Laveleye, and others, on the ground 
that taxation is the means whereby the consumption of government 
is provided for. 

■^ Compare Part v. of General Walker's Political Economy ; also 
Part iv., Chapter 3, of Leroy-Beaulieu's Precis d'Economie Politique. 
It will be observed that even among those economists who recognise 
a distinct doctrine of consumption, there is far from being complete 
agreement as to what problems should be included within this depart- 
ment. The theory of population, for example, which General Walker 
introduces in this connexion, is treated by James Mill under distribu- 
tion, and by M<^Culloch under production, while Roscher makes it a 
fifth department of political economy, distinct from production, cir- 
culation, distribution, and consumption. There is, again, a divergence 
of view in regard to the place of commercial depression, and the theory 
of taxation ; and the theory of consumption of Jevons and Walras is 
quite different from that of any of the other writers above referred to. 



NOTE.] CONSUMPTION OF WEALTH. 109 

under a system of exchange can these phenomena arise. 
Again, the incidence of taxation is directly connected with 
the phenomena and laws of the distribution of wealth ; 
and the remainder of the theory of taxation, except in so 
far as it relates to the effect of different forms of taxation 
on production, belongs to applied economics, rather than to 
tlie positive science of economics, with which alone we are 
liere concerned. This last remark applies also to the dis- 
cussion of sumptuary laws, and to all enquiries how far and 
in '^hat directions the increase of consumption should be 
encouraged or discouraged. Insurance may fairly be re- 
garded as a question of distribution. As to the theory of 
population, since labour is one of the requisites of produc- 
tion, the law of its increase may be discussed in connexion 
with production ; or it may be included in the theory of 
distribution, in connexion with the laws regulating, through 
the supply of labour, the normal rate of wages. The theory 
of utility occupies, as we go on to shew, a unique position. 
It is, however, intimately connected with the determination 
of laws of exchange-value. 

The truth is that the phenomena of production, dis- 
tribution, exchange, and consumption, respectively, all so 
act and react upon one another, that if any one of these 
classes of facts is given no independent treatment, it must 
nevertheless come in for a large share of discussion in con- 
nexion with the others. Whether all propositions relating to 
consumption should be arranged by themselves or discussed 
as they arise in relation to other topics is, therefore, to a cer- 
tain extent a mere question of convenience of exposition'. 

1 Thus, Dr Sidgwick, while explicitly admitting the fundamental 
importance of certain propositions relating to consumption, thinks 



110 CONSUMPTION OF WEALTH. [CHAP. III. 

On the whole, it appears tliat the distinction lietween 
productive and unproductive consumption, the j)henoraena 
of over-production, the principles of taxation, &c., discussed 
under the head of consumption by James Mill and others, 
fall quite naturally and conveniently into other departments 
of economic science. The theory of utility, as discussed by 
Jevons, stands on a different footing. For unlike theories 
of taxation, population, and so on, it relates in itself purely 
to the consumption of wealth, and hence has a much 
stronger claim to be considered a distinct tlieory of consump- 
tion. At the same time, for reasons that have been already 
briefly indicated in connexion with Jevons's description 
of economics, this theory may be regarded as constituting 
part of the necessary prolegomena of economic science, 
rather than one division of completed economic doctrine. 
\ The consumption of wealth is not so much an economic 

that in such a treatise as his own, it is more convenient to introduce 
these propositions in dealing with the questions of production, distri- 
bution, and exchange, which they help to elucidate, rather than to 
bring them together under a separate head {PrincipJe^ of Political 
Economy, 1901, p. 34). J. S. Mill {Unsettled Questions, p. 132, note), 
and Cherbuliez {Precis ile la Science Economique, p. 5) are somewhat 
less guarded in their rejection of consumption as a special topic for 
discussion. "Political economy," says Mill, "has notbing to do with 
the consumption of wealth, further than as the consideration of it is 
inseparable from that of production, or from that of distribution. 
We know not of any laws of the conKiimptioii of wealth as the subject 
of a distinct science : they can be no other than the laws of human 
enjoyment." "The cousumi^tion of wealth," says Cherbuliez, "is 
in its only important form a phenomenon which cannot be separated 
from the production of wealth. Unproductive consumption is the 
application of wealth to the needs for which it was produced. If 
requires no further discussion. When wealth gets into the hands of 
the unproductive consumer, economic activity is at an end." 



NOTE.] CONSUMPTION OF WEALTH. Ill 

activity in the sense in which that term has been above 
defined, as itself the end and aim of all economic activity. 
Wealth is produced, distributed, exchanged, in order that 
it may be consumed. The satisfaction of human needs is 
the motive power throughout. Thus, a true theory of con- 
sumption is the keystone of political economy ; but it may, 
nevertheless, be regarded as occupying the position of a 
fundamental datum or premiss of the science, rather than 
as constituting in itself an economic law or laws on a par 
with the laws of production, distribution, and exchange. . j 



CHAPTER IV. 

ON THE RELATION OF POLITICAL ECONOMY 
TO GENERAL SOCIOLOGY. 

§ 1. Conflicting views of the relation between 
economic science and the general science of society. — 
Before proceeding further, it is necessary to enquire 
explicitly whether political economy is really entitled 
to rank as a distinct department of study at all. It 
is maintained by Comte and his followers that on 
account of the extremely intimate connexion between 
the phenomena of wealth and other aspects of social 
life, any attempt to separate economic science from 
social philosophy in general must necessarily end in 
failure. Tlie phenomena of society, it is said, being 
the most complicated of all phenomena, and the various 
general aspects of the subject being scientifically one 
and inseparable, it is irrational to attempt the economic 
or industrial analysis of society, apart from its intel- 
lectual, moral, and political analysis, past and present. 
It is admitted that certain of the facts of wealth may 
by a scientific artifice be studied separately, but it is 



II 



CHAP. IV.] POLITICAL ECONOMY AND SOCIOLOGY. 113 

denied that their investigation can constitute a distinct 
science \ 

In striking contrast to the above is the view 
of those economists who regard political economy as 
an independent abstract science, dealing with the 
phenomena of wealth in isolation, and having no 
concern whatever with other social phenomena. While 
on the former view the relation of economics to socio- 
logy is properly one of entire subordination or rather 
inclusion, on this view it is one of absolute independ- 
ence ; the facts of wealth are to be studied in and 
by themselves ; they are to be treated as having 
no relation to other social facts ; man is to be con- 
sidered as a being who is occupied solely in acquiring 
and consuming wealth. 

The truth lies between these two extreme views. 
What may be called the extreme separatist doctrine 

^ Compare Miss Martineau's Positive Philosophy of AugiLste Covite, 
vol. 2, pp. 51—54 ; also Mr Frederic Harrison's essay entitled Pro- 
fessoi- Cairnes on M. Comte and Political Economy in the Fortnightly 
Revieiv for July, 1870. Comte's views have more recently been given 
fresh prominence in this country by Dr Ingram's article on Political 
Economy in the ninth edition of the Encyclopaedia Britannica 
(republished as a History of Political Economy). Dr Ingram 
combines his history with an elaborate attack on the manner in 
which the science has been for the most part studied in England, 
and arrives at the conclusion that political economy cannot any 
longer command attention as a fruitful branch of speculation unless 
it is subsumed under and absorbed into general sociology. " The one 
thing needful," he says, " is not merely a reform of political economy, 
but its fusion in a complete science of society." 



114 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP. 

affirms of political economy as a whole what is true 
only of a certain portion or aspect of it, and hence 
would leave the science incomplete. Comte's view, 
on the other hand, overlooks the fact that only by 
specialization within proper limits can scientific 
thoroughness and exactness be attained in any depart- 
ment of knowledge. Students of economics may, 
moreover, naturally and fairly ask to have the province 
of sociology itself more explicitly defined, and to see 
its own fundamental doctrines more clearly formulated, 
before they can be expected to shew a willingness to 
have jDolitical economy subsumed under and absorbed 
into it. 

It will be our endeavour to shew that whilst the 
study of economic phenomena cannot be completed 
without taking account of the influence exerted on the 
industrial world by social facts of very various kinds, 
it is nevertheless both practicable and desirable to 
recognise a distinct systematized body of knowledge, 
which is primarily and directly concerned with economic 
phenomena alone. On this view, economics is regarded 
as constituting one division of the general philosophy 
of society, of which other divisions are jurisprudence, 
the science of political organization, and the philosophy 
of religious, moral, and intellectual development ; but 
it is allowed its own set of specialists, and the 
necessity of systematically combining the study of 



IV.] POLITICAL ECONOMY AND SOCIOLOGY. 115 

economic phenomena with that of other aspects of 
human existence is denied. It is, in other words, held 
to be possible for the economist to steer a middle 
course, neither assuming throughout the whole range 
of his investigations an entirely unreal simplicity, nor, 
through the neglect of that specialization which has 
been found indispensable in the physical sciences, 
allowing himself to be hopelessly baffled by the com- 
plexity of the actual phenomena. 

It should be carefully borne in mind that throughout 
this chapter, as in the chapters that follow, political 
economy is regarded as a positive science. Similarly 
by sociology is understood a body of theoretical truth, 
not a system of practical maxims. The separate 
existence of economic theory is not imperilled, when it 
is admitted that practical arguments based on economic 
grounds alone are rarely in themselves decisive. The 
two questions are often not clearly distinguished from 
one another. It is, however, important to recognise 
that those who stand out most strongly for the 
recognition of a separate economic science may hold 
equally strongly that no true guidance in matters of 
conduct is to be obtained by appealing simply to 
economic considerations, all social consequences of a 
non-economic character being disregarded. 

I 2. The place of abstraction in economic reasoning. — 
According to what has been above called the extreme 

8—2 



116 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP. 

separatist view, political economy takes one aspect of 
human society and action, and considers it absolutely 
alone and apart, the science being concerned with man 
solely as a being who desires to possess wealth. Just 
as the geometer considers the dimensions of bodies I 
apart from their physical properties, and the physicist 
their physical properties apart from their chemical 
constitution, so the economist is said to regard man 
simply as a being who, in all his economic relations, is 
actuated by an enlightened self-interest, and who is also 
free to act accordingly, so far as he does not interfere 
with a like freedom on the part of others. 

This view of political economy is taken by J. S. Mill in 
his Essays, although, as we have previously had occasion 
to remark, his constructive treatise on the science is 
worked out on different and much broader lines^ He 
describes economics as treating of the laws of the 

1 Professor Marshall puts the contrast very clearly and forcibly. 
" In 1830," he says, " John Mill wrote an essay on economic method, 
in which he proposed to give increased sharpness of outline to the 
abstractions of the science. He faced Kicardo's tacit assumption 
that no motive of action except the desire for wealth need be much 
considered by the economist ; he held that it was dangerous so long 
as it was not distinctly stated, but no longer ; and he half promised 
a treatise, which should be deliberately and openly based on it. But 
he did not redeem the promise. A change had come over his tone of 
thought and of feeling before he published in 1848 his great economic 
work. He called it Principles of Political Economij with some of their 
Applications to Social Philosophy ; and he made in it no attempt to 
mark oS by a rigid line those reasonings which assume that man's 
sole motive is the pursuit of wealth from those which do not. " 



IV.] ECONOMICS REGAEDED AS AN ABSTRACT SCIENCE. 117 

production and distribution of wealth, not so far as these 
laws depend upon all the phenomena of human nature, 
but only so far as they depend upon the pursuit of 
wealth, or upon the perpetually antagonizing principles 
to this pursuit, namely, aversion to labour, and desire 
of the present enjoyment of costly indulgences. Entire 
abstraction is to be made from every other human 
passion or motive. In other words, the economist 
is supposed to take as his subject of study, not the 
entire real man, as we know him in all the complexity 
of actual life, but an abstraction — usually spoken of as 
the economic man — a being, who, in the pursuit of 
wealth, moves along the lines of least resistance, and 
does not turn aside towards other ends. 

In accordance with this view, political economy is 
defined as "the science which traces the laws of such of 
the phenomena of society as arise from the combined 
operations of mankind for the production of wealth, 
in so far as those phenomena are not modified by the 
pursuit of any other object."^ It is admitted that the 

^ Unsettled Questions of Political Economy, p. 140. Bagebot, in 
his Economic Studies, expresses himself similarly. " Political eco- 
nomy in its comjDlete form, and as we now have it, is an abstract 
science, just as statics and dynamics are deductive sciences. And, in 
consequence, it deals with an unreal and imaginaiy subject" (p. 73). 
It ' ' deals not with tbe entire real man as we know him in fact, but 
with a simpler, imaginary man — a man answering to a pure defini- 
tion from which all impairing and conflicting elements have been 
fined away. The abstract man of this science is engrossed with one 



118 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP. 

economist must allow for the interference of other 
impulses in applying his results, and that he ought, 
even in the formal exposition of his doctrines, to , 
introduce many practical modifications ; but the f 
recognition of these other impulses is excluded from 
the science itself. 

The single error involved in the above view is 
that of mistaking a part for the whole, and imagining 
political economy to end as well as begin with mere 
abstractions. The practical modifications, of which 
Mill speaks, themselves demand a scientific treatment, 
and should, therefore, have a place accorded to them 
within the science itself. For in many cases they are 
not mere isolated modifications, admitting of application 
to individual instances only. It is often possible to 
generalize on other foundations than that of the 
economic man ; and, at any rate, the various inter- 
desire only — the desire of jDOssessing wealth" (p. 74). This view 
of political economy is justified by Bagehot on the ground that " the 
maxim of science is simply that of common sense — simple cases first ; 
begin with seeing how the main force acts when there is as little as 
possible to impede it, and when you thoroughly comprehend that, 
add to it in succession the separate effects of each of the encumbering 
and interfering agencies" (p. 74). The maxim here cited may be 
accepted without hesitation ; but it seems hardly consistent with the 
previous statement that political economy in itn complete form is an 
abstract science, etc. Our contention is that while economics rightly 
begins with abstractions, in its complete form it has as good a 
claim to be called a realistic as to be called an abstract science. 
What appears to be the correct doctrine is clearly laid down by 
Cairnes in his Logical Method of Political Economy, ^^. 4'2 — i5. 



IV.] THE DESIRE FOE WEALTH. 119 

ferences with free competition admit of scientific 
enumeration and classification. 

The abstraction by which men are supposed in their 
economic dealings to act exclusively with a view to 
a certain proximate end\ namely, the attainment of 
a maximum value with a minimum of effort and sacri- 
fice, has nevertheless its place, and a very important 
place, in political economy. For while it is true that 
our economic activities are subject to the influence 
of a variety of motives, which sometimes strengthen 
and sometimes counteract one another, it is also true 
that in economic affairs the desire for wealth exerts 
a more uniform and an indefinitely stronger influence 
amongst men taken in the mass than any other 
immediate aim. Hence, in order to introduce the 
simplicity that is requisite in a scientifically exact 
treatment of the subject, it is legitimate and even 
indispensable to begin by tracing the results of 
this desire under the supposition that it operates 
without check. By thus ignoring at the outset all 
other motives and circumstances, except those implied 
in the notion of free and thoroughgoing competition, 

^ It will help to prevent misunderstauding to regard the " economic 
man" as aiming at the attainment of a certain proximate end, rather 
than as acting from purely egoistic motives. From what ulterior 
motives, and with a view to what ultimate ends, men desire wealth is 
immaterial as affecting their conduct so far as the economist is con- 
cerned with it. We go on to shew that the ulterior motives which 
impel men to seek wealth may be far other than egoistic. Compare 
Sigwart, Logic, § 99 (English translation, volume 2, pp. 435 — 457). 



120 POLITICAL ECONOMY AND SOCIOLOGY, [CHAP. 

we may, at any rate in certain departments of enquiry, 
determine the more constant and permanent tendencies 
in operation, and hence reach a first approximation 
towards the truth. 

As a matter of fact, this approximation is in some 
cases a very near approximation indeed. In dealing, 
for instance, with prices on the Stock Exchange, 
or in the great wholesale markets, under modern 
industrial conditions, we are for the most part con- 
cerned with the economic activities of persons who 
practically realise in actual life the notion of the 
economic man. This by no means implies that the 
persons referred to are what we should ordinarily call 
selfish. For men of the most unselfish character are, in 
many of their commercial dealings, influenced directly 
by what may be termed strictly commercial aims — 
subject only to the restraints of law and of ordinary 
commercial custom and morality. They may desire 
wealth in order to educate and bring up their children 
with a view to their children's best interests, or in 
order that they may devote their wealth to particular 
philanthropic objects, or to the general well-being of the 
community to wdiich they belong. Still the desire for 
wealth is in its immediate economic effects the same, 
whatever its ultimate object may be\ 

1 Cliffe Leslie criticizes the conceptioii of the desire of wealth as a 
]>arren abstraction, in which are confounded together many different 
desires whose actual consequences are indefinitely various. "No 



IV.] THE DESIRE FOR WEALTH. 121 

There are cases, then, where ends other than 
pecuniary exert so little immediate influence that they 

other branch of philosophy," he remarks, "is still so deeply tinctured 
with the realism of the schools as economic science. A host of 
different things resemble each other in a single aspect, and a common 
name is given to them in reference to the single feature which they 
have in common. It is, properly speaking, only an indication of this 
common feature, but it puts their essential differences out of mind, 
and they come to be thought of in the lump as one sort of thing. The 
desire of wealth is a general name for a great variety of wants, desires, 
and sentiments, widely differing in their economical character and 
effect, undergoing fundamental changes in some respects, while 
preserving an historical continuity in others. Moralists have fallen 
into a similar error, though from an opposite point of view, and, in 
their horror of an abstraction, have denounced, under the common 
name of love of wealth, the love of life, health, cleanliness, decency, 
knowledge, and art, along with sensuality, avarice, and vanity. So 
all the needs, appetites, passions, tastes, aims, and ideas, which the 
various things comprehended in the word ' wealth ' satisfy, are lumped 
together in political economy as a principle of human nature, which 
i« the source of industry and the moving principle of the economic 
world... The division of labour, the process of exchange, and the 
intervention of money, have made abstract wealth or money appear 
to be the motive to production, and veiled the truth that the real 
motives are the wants and desires of consumers ; the demands of 
consumers determining the commodities supplied by producers. 
After all the reproach cast on the Mercantile School, modern 
economists have themselves lapsed into the error they have imputed 
to it. If every man produced for himself what he desires to use or 
possess, it would be patent and palpable how diverse are the motives 
summed up in the phrase ' desire for wealth ' — motives which vary in 
different individuals, different classes, different nations, different 
sexes, and different states of society... The desire for wealth is by no 
means necessarily an incentive to industry, and still less to abstinence. 
War, conquest, plunder, piracy, theft, fraud, are all modes of acquisi- 
tion to which it leads. The robber baron in the reign of Stephen, 
and the merchant and the Jew whom he tortured, may have been 
iutluenced by the same motives. The prodigal son who wastes his 



122 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP. 

may, without serious risk of error, be neglected even 
in the concrete applications of economic doctrines. 
More usually, however, this abstraction from other 

substance in riotous living is influenced by the same motives — the 
love of sport, sensual pleasure, luxury, and ostentatious display — 
which impel many other men to strenuous exertion in business " 
(Essaijit, pp. 166 — 170). The whole of the above argument is very 
persuasively put, but it does not establish the conclusion that Cliffe 
Leslie desires to establish. By the desire of wealth is meant the 
desire of general purchasing power, that is, the desire to increase one's 
command over the necessaries and conveniences of life in general ; 
and nothing that Cliffe Leslie says proves it to be either an illegiti- 
mate or a barren assumption that in their ordinary economic dealings 
men are in the main influenced by this desire, and that, in consequence, 
a greater gain is preferred to a smaller. That there are enormous 
variations in men's ideas, as to the particular things that constitute 
the necessaries and conveniences of life, is nothing to the point. 
For, as observed in the text, the immediate effects of the desire of 
wealth may be the same, although the ulterior objects had in view 
are very different. A man may desire general purchasing i^ower in 
order that he may be assisted towards the attainment of the noblest 
and most unselfish ends, but it does not follow that he will therefore 
sell his services or his goods at less than their market value. Granting 
that the objects of men's desires are very various, still, as Dr Sidgwick 
puts it, so far as they are exchangeable and commenwurable iu value, 
they "admit of being regarded as definite quantities of one thing — 
wealth ; and it is just because the ' desire of wealth ' may, for this 
reason, be used to include ' all the needs, appetites, passions, tastes, 
aims, and ideas, which the various things comprehended under the 
word wealth satisfy ', that we are able to assume, to the extent 
required in deductive political economy, its practical universality and 
unlimitedness " [Political Econormj, 1891, pp. 41, 2). We may add that 
it is also not to the point that, under different conditions, the desire of 
wealth may lead to very different lines of conduct. The assumption 
that men are actuated by this desire is, in economic reasonings, com- 
bined with other assumptions — as, for example, the absence of force 
and fraud — which circumscribe within certain limits the modes in 
which the desire can operate. 



I 



IV.] THE DESIRE FOR WEALTH. 123 

influences yields only an approximation towards the 
actual truth, which approximation needs subsequently 
to be developed and corrected. 

Even the above degree of validity is denied to 
the postulate in question by some economists. They 
hold that if the abstraction whereby we suppose men 
to act solely with a view to their own advantage is 
not condemned as leading to positive error, it should 
at least be rejected as practically useless. It is in 
manifest contradiction, they say, to the facts of life. 
Knies, for example, rejects it on the ground that a 
society of men actuated solely and continuously by 
self-interest, and allowed absolute freedom of action, 
has never actually existed. He admits the possibility 
of hypothetically working out the laws of price, &c., 
that would arise in such a society were it to exist, 
but he denies that such a hypothetical enquiry has 
any utility or practical justification. One might just 
as well, he says, base an enquiry on the hypothesis 
that all men are inspired by altruism, or that they 
all have an equally strong impulse towards charity ; 
and he implies that such enquiries as these would be 
in all respects equally serviceable — or unserviceable — - 
in enabling the economist to understand and explain 
the phenomena of the actual economic worlds 

1 Die Politische Oekonomie vom geschichtlichen Standpunkte, 1883, 
p. 504. 



124 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP. 

The first point in the above argument — that no 
society of pure egoists has ever actually existed — 
is, strictly speaking, irrelevant. For the economists, 
whom Knies is criticizing, have always insisted that 
they are dealing with abstractions, with imaginary 
beings of a simpler type than are to be met with in 
real life. They have never posited the actual existence 
of a society of men, guided in all their actions by pure 
self-interest. The gist of their argument is not even 
that, in the one sphere of life with which they as 
economists are concerned, the desire for wealth operates 
by itself and subject to no interference from the 
operation of other motives. All they affirm is that, 
taking a broad survey of the economic sphere, the 
desire of each man to increase his command over 
wealth is far more powerful, and far more uniform in 
its operation, than the other motives, which sometimes 
act as a drag upon it. They hence argue that by 
calculating the consequences of this desire, they will 
be materiall}' assisted towards determining what will 
happen on the average or in the long run^ 

The latter part of Knies's criticism cannot be 
ruled out as irrelevant, but it breaks down on the 

1 Menger specially insists that the use of the so-called do<j;ma of 
self-interest is misunderstood by the historical school of German 
economists, when they regard it as forming such a disturbing contrast 
to "full empirical actuality." See his Methode der Sociahcisseii- 
schaften, p. 79. 



IV.] DEFEI^^CE OF THE METHOD OF ABSTRACTION. 125 

score of invalidity. It amounts to this — that a 
doctrine, based on the hypothesis of pure altruism, 
would be just as near the concrete reality, as one 
based on the hypothesis of pure egoism ; in other 
words, that, in their economic dealings with one 
another, men are as uniformly and as powerfully 
influenced by an immediate desire to augment their 
neighbour's wealth as by a desire to augment their 
own^ But this argument is certainly contradicted by 
all the facts of actual economic life. Look where we 
will in the industrial world, do we not find self-interest 
— controlled though it may be by moral, legal, and 
social considerations — the main force determining men's 
actions ? Is it not a patent fact that in buying and 
selling, in agreeing to pay or to accept a certain rate 
of wages, in letting and hiring, in lending and borrow- 
ing, the average man aims at making as good a bargain 
for himself as he can ? He may be restrained within 
certain limits by law, morality, and public opinion ; 
and the influence exerted by restraining forces such as 

1 Theoretically an attempt might be made to work out deductively 
the consequences of the sole operation of altruistic motives, all inter- 
ferences due to the operation of other motives being ignored. The 
contention in the text is, however, that this would not in any case 
have any practical value. Sir Henry Maine rightly urges that " the 
practical value of all sciences founded on abstractions depends on the 
relative importance of the elements rejected and the elements retaiired 
in the process of abstraction " {Early History of Institutions, p. 361). 
The question at issue turns therefore on the relative importance of 
egoistic and altruistic motives in economic affairs. 



126 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP. 

these must be ultimately taken into account. Still the 
desire for wealth is, under normal conditions, the active 
impelling force ; and the immediate economic conse- 
quences of this desire are the same, however unselfishly 
the wealth gained may ultimately be expended. It is 
this fact of common experience that justifies economists 
in starting from the conception of the economic man, 
as approximately typical of actual men considered in 
their economic relations. Conclusions based on this 
conception contain a hypothetical element ; but they 
are nevertheless, at any rate in certain departments of 
the science, within measurable distance of the concrete 
realities of the actual economic worlds 

1 The above is freely allowed by some writers who on other grounds 
criticize the English school of political economy. " No economist," 
says Professor K. Mayo-Smith, " would venture on the solution of an 
economic problem without taking into consideration the fact that men 
are ordinarily moved by self-interest " {Science Economic Discussion, 
p. 113). " Hypothetically," says Wagner, "the use of the theory of 
self-interest is always proper ; and, for the isolation of causes, it has 
proved the best of methodological tools. For we have hei'e an element 
common to all men. We have an element founded on a law which is 
in truth a ' natural ' and universal law. It is based on the physical 
nature of man, on his mental nature (which dejjends primarily on his 
physical nature), and on his relations to the external world. As it 
affects the individual, so, also, it represents the interest of the species, 
since the species exists and is continued only through the individual. 
The objections of historical economists are obscure, and are cariied 
too far, when, instead of admitting the hypothetical value of de- 
duction from self-interest, they deny that it has any value what- 
ever. They make a mistake which is the reverse of the mistake 
of the advocates of pure deduction ; and their mistake is the greater. 
In considering the moditications of industrial self-interest in dif- 



IV.] DEFENCE OF THE METHOD OF ABSTRACTION. 127 

At the same time, in so far as it can be shewn 
that in certain spheres of economic action men are 
normally moved by altruistic motives, this can be more 
or less recognised in the abstractions upon which the 
economist's more general reasonings are based. It is, 
however, doubtful whether it would be possible, in any 
case, to base upon the hypothesis of general altruism 
an exact science corresponding to English political 
economy. For the desire for the general welfare is 
not a motive capable of being measured in the same 
way as the desire for wealth can be measured^ 

We have in the above argument accepted the 
description which Knies gives of the economic man 

ferent individuals, different peoples, at different times, and its various 
combinations with other motives, they forget that there is, after 
all, a universal element of humanity in this selfishness " (Jahr- 
hilcher fur Nationalokononiie und Statistik, March, 1886, p. 231 ; 
Quarterly Journal of Economics, October, 1886, p. 118). Wagner goes 
on to point out, what we have already insisted upon, that "aelf- 
interest, when spoken of as the motive of industrial action, often does 
not mean one's individual interest alone, but includes the interest of 
others ; to be sure, of others in whose welfare the jDerson who acts 
takes an interest. Consider the family, the acquisition of property 
for transmission to descendants. Here the egoistic action passes 
over into altruistic action. But it may nevertheless be said that, 
although there is a widening of the egoistic motive beyond the 
individual, it still remains egoistic." There may seem contradiction 
here ; but there is no real contradiction. An individual action may 
form one link in a series of actions which, considered in their totality, 
are altruistic ; and yet considered by itself, and in relation to its 
immediate consequences, it may be undistinguishable from an action 
that is purely egoistic. 

1 Compare Marshall, Present Position of Economics, §§ 8—11. 



128 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP. 

as being actuated solely by self-interest. But it must 
be remembered that, as we have shewn, the economic 
man need not be conceived as a pure egoist. All we 
assume is that in his economic activities his immediate 
aim is the attainment of a maximum of wealth with a 
minimum of effort and sacrifice ; and it is only with 
reference to this immediate aim that we can describe 
him as actuated by self-interest alone. 

But it is time now to turn to the other side of the 
picture. Whilst the process of abstraction from the 
full empirical actuality is an instrument of the greatest 
possible utility in economic investigations, the econo- 
mist cannot by this means alone explain all industrial 
facts. Neither the conception of the economic man 
nor any other abstraction can suffice as an adequate 
basis upon which to construct the whole science of 
economics. In completing our investigations we have 
generally speaking to deal with something far more 
complex. As Roscher puts it, we must in our finished 
theory " turn to the infinite variety of real life." ' 

1 "The abstraction according to which all men are by nature the 
same, different only in consequence of a difference of education, 
position in life, &c., all equally well equipped, skilful, and free in the 
matter of economic production and consumption, is one which, as 
liicardo and von Thiiiren have shewn, must pass as an indispens- 
able stage in the preparatory labours of political economists. It 
would be especially well, when an economic fact is produced by the 
co-operation of many different factors, for the investigator to mentally 
isolate the factor of which, for the time being, he wishes to examine 



IV.] LIMITS OF THE METHOD OF ABSTRACTION. 129 

§ 3. Examples of economic problems requiring for 
their complete solution a realistic treatment.— It is in 
attempting the final solution of problems, relating to 
the distribution of wealth, that it is most obviously 
insufficient to regard mankind as simply and entirely 
concerned in the pursuit of gain, irrespective of social 
surroundings, and the operation of other than pecuniary 
motives \ The love of a certain country or a certain 

the peculiar nature. All other factors should, for a time, be con- 
sidered as not operating, and as unchangeable, and then the question 
asked, What would be the effect of a change in the factor to be 
examined, whether the change be occasioned by enlarging or dimi- 
nishing it ? But it never should be lost sight of, that such a one is 
only an abstraction after all, from which, not only in the transition 
to practice, but even in finished theory, we must turn to the infinite 
variety of real life " [Principles of Political Economy, § 22). 

^ If by an economic motive is meant any motive that influences 
men's economic activities, it is clear that the desire of wealth is not 
the only economic motive. Wagner gives a five-fold classification of 
economic motives in the above sense : four egoistic, and one non- 
egoistic. (1) The wish for gain, and the fear of want. (2) The hope 
of reward of a non-economic kind [e.g., approval), and the fear of 
disadvantages of a non-economic kind {e.g., punishment). The 
operation of such motives as these is important in connexion with 
slave labour. (3) The sense of honour, and the fear of disgrace. The 
gild system under ideal conditions is an example of the operation of 
these motives. Another exaniple is to be found in the pride which 
every good workman takes in the quality of his work. (4) The 
impulse to activity and to the exercise of power, and the fear of 
the results of inactivity. " Sometimes, in the restless activity of 
men who carry on industry on a great scale, the wish to accumulate 
property is the immediate aim — but not so much for the sake of 
material advantage, as for the sake of the power which a fortune 
confers." The motive of rivalry, which may also under certain 
conditions exert an appreciable influence, is closely akin to the 

K. 9 



130 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP. 

locality^ inertia, habit, the desire for personal esteem, 

love of power. (5) The non-egoistic motive is the sense of duty 
and the fear of conscience. "Because of it, competition is not 
pressed to the utmost, prices do not reach the highest or lowest 
limits which the pursuit of individual advantage would fix, and would 
fix without encountering an effective check in the mere sense of 
honour and propriety. Under this head, we are to class not only all 
charitable action, but the cases where an industrial or social superior 
purposely refrains from making his own interest the exclusive ground 
of his economic conduct." See Wagner's Grundlcgung der politischen 
Ockonomie, §§ 33 — 46; and Quarterly Journal of Economics, vol. 1, 
pp. 118—121. 

^ "Political economists," said Mr Chamberlain in a speech at 
Inverness in September, 1885, "find it difficult, perhaps, to under- 
stand how such unpractical considerations as the traditions and 
the history of a race, the love of home and of country, religious 
enthusiasm, and political sentiments, should absolutely prevent a 
Highlander from accepting with complacency a proposal to exile him- 
self from the land, which his forefathers have possessed and cultivated, 
for which they have shed their blood, and in which they lie buried. 
But human nature is a greater force even than the laws of political 
economy, and the Almighty Himself has imjalanted in the human 
breast that passionate love of country, which rivets with irresistible 
attraction the Esquimaux to his eternal snows, the Arab to his sandy 
desert, and the Highlander to his rugged mountains." None of our 
leading economists are really open to this reproach. In the appli- 
cations of i3olitical economy, if not as an integral portion of the 
science itself, they recognise the necessity of investigating inductively 
the operation of all the forces that affect the movement of labour 
from country to country, and from place to place within the same 
country ; and amongst such forces they do not overlook those here 
referred to by Mr Chamberlain. The above quotation may serve to 
illustrate how narrow and one-sided is the political economist in the 
general estimation ; and how common it is to substitute for the views 
of economists themselves, the opinions of superficial readers who 
have separated fragments of economic doctrine from their proper 
context. Because of misunderstandings of this sort it becomes the 
more necessary to insist that the abstract theory does not exhaust 
the whole of the science. 



IV.] ECONOMIC MOTIVES. 131 

the love of independence or power, a preference for 
country life, class prejudice, obstinacy and feelings of 
personal ill-will \ public spirit, sympathy, public opinion, 
the feeling of duty with regard to accepted obligations, 
current notions as to what is just and fair, are amongst 
the forces exerting an influence upon the distribution 
of wealth, which the economist may find it necessary 
to recognise, though the precise weight to be attached 
to them varies enormously under different conditions. 
The special influence that may be exerted by ethical 
motives has been referred to in rather more detail in 
an earlier chapter. It is to be remarked that even in 
the abstract theory the economist assumes that the 
rules of conventional morality in matters of business 
are generally accepted and obeyed. The standard of 
such conventional morality is, however, subject to 
variations, as also the extent to which departures from 
it are common ; and variations of this kind should not 
be overlooked by the economist in his more concrete 
investigations. As a special case, attention may be 
called to the extent to which the conventional morality 
of the market pushes the rule of caveat emptor. Even 
in the same society at the same time this varies in 
different classes of transactions. 

Amongst important circumstances affecting wages 
are qualities of co-operativeness and habits of combi- 
1 These forces may exert an important influence in trade disputes. 

9—2 



132 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP. 

nation amongst the labouring classes, as well as the 
social forces and legal regulations which determine how 
far these qualities and habits shall have free play. 
Again, in discussing the labour question, it is obvious 
that differences of enterprise and knowledge as affecting 
a man's willingness or ability to change his condition 
must not be overlooked. Regard must also be had to 
legislation of every kind in so far as it directly or in- 
directly affects the mobility of labour. To take a special 
case, — the economist has to discuss the circumstances 
determining the wages of women, and to enquire whether 
these are in any way different from those determining 
the wages of men ; but only by investigating the opera- 
tion of various social influences can he obtain anything 
like an adequate solution \ 

Turning to the more general problem of the causes 
of variations in the supply of labour, we find it to be 
one that depends materially on the social, intellectual, 
and moral circumstances that determine men's standard 
of comfort, as well as on such conditions as the price of 
food and other necessaries. This point may be illus- 
trated by reference to Mill's treatment of the argument 
that under socialism, " the prudential restraint on the 
multiplication of mankind would be at an end, and 

1 Compare the treatment of this problem m Walker's Wages 
Question, pp. 372 — 384; and in Professor and Mrs Marshall's 
Economics of Industry, pp. 175 — 177. 



IV,] MOTIVES AFFEOTING THE SUPPLY OF LABOUR. 133 

population would start forward at a rate which would 
reduce the community, through successive stages of 
increasing discomfort, to actual starvation."^ He says 
that " there would certainly be much ground for this 
apprehension," if socialism " provided no motives to 
restraint, equivalent to those which it would take 
away " ; but he then goes on to speak of the force of 
public opinion as possibly supplying a new motive, to 
which, in accordance with the general tenour of his 
remarks, might be added that of public spirit and care 
for the general well-being. It is easy to exaggerate the 
probable efficacy of these forces; but the illustration 
will at least serve to shew how, in arguing from one 
state of society to another, there is need to investigate 
and allow for the effects which different surroundings 
may have on human action. 

When we pass to the production and accumulation 
of wealth, we find again that the motives in operation 
vary in different instances ^ Work, for instance, that 



^ Principles of Political Economy, ii. 1, § 3. 

- " In vast permanent societies, in long ages of history, populations 
such as the Egyptian and the Indian, under a strict caste system, 
have shewn an astonishing degree of industry, directly stimulated by 
habit, social feeling, and religious duty, and, in a very slight degree, 
by personal desire of gain. In religious societies under very different 
kinds of faith, very active industry, on a scale quite decisive as an 
experiment, has been stimulated by purely religious motives. Some 
of the most splendid results of industry ever recorded — the clearing 
of wildernesses ; vast public works, such as bridges, monuments, and 



134 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP. 

is inspired by mere love of routine, and saving that has 
become a mere habit, are not so uncommon as d priori 
we might be inclined to imagine. One consequence 
of 'the latter fact is that we cannot discover the laws 
determining the accumulation of capital, or the precise 
way in which a fall in the rate of interest will affect 
saving, by considering exclusively the effect of the 
desire of wealth. 

Even in the case of a purely monetary question, 
such as the circumstances determining the amount of 
the depreciation of an inconvertible currenc}', an im- 
portant consideration may be the extent to which a 
people's distrust is aroused, and this in its turn may 
depend partly on their political sympathies, or on their 
knowledge and intelligence, or on the extent to which 
their power of moral restraint prevents them from giving 
way to unreasoning panic. This last point is still more 
clearly important in connexion with the phenomena that 
constitute a financial crisis. [The theory, for example, 
of the recurrence of such crises at regular intervals, so 
far as it does not involve the operation of physical 
causes (as in Jevons's sun-spot theory), may require 



temples ; the training of whole races of savages into habits of toil — 
have been accomplished by purely religious bodies on purely religious 
motives, by monks, missionaries, and priests." — Frederic Harrison 
on the Limits of Political Economy in the Fortnightly Review, 
15 June 1865. 



IV.] INFLUENCE OF LEGAL AND SOCIAL CONDITIONS. 135 

to be modified according to the stage of a nation's 
intellectual and moral development. 

Further illustrations might be added, bringing out 
in particular the influence exerted on industrial pheno- 
mena by legal conditions \ and by political and social 
institutions ; but enough has been said to shew that, 
while the pursuit of wealth may be the main force of 
which account has to be taken, still — if economic science 
is to succeed in affording an adequate explanation and 
elucidation of the facts of economic life — it is necessary 
also to have regard to social surroundings, and the 
operation of diverse other motives. 

I 4. Distinction between political economy and other 

social enquiries. — Since a realistic treatment of economic 

problems is usually essential to their complete solution, 

it is necessary that economists should keep in view 

all the various aspects of social life ; and it is clearly 

mischievous to aim at an entire isolation of economics 

from other social sciences. But political economy does 

not, therefore, lose its individuality. For the recognition 

that the various forms of social activity are in many 

ways interdependent does not destroy the significance 

of the differences between them ; and to do away with 

the boundaries, that now separate the different social 

1 It is pointed out by Schonberg that the legal factor is one that 
must always operate, however much the maxim of laisser /aire is 
allowed to exert an influence. There must be laws relating to 
property, &c. 



136 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP. 

sciences, would be to sacrifice all the gain resulting 
from scientific division of labour. Political economy 
has necessarily to take account of facts that belong 
primarily to other subdivisions of social enquiry ; but 
its study of them is confined to one particular point of 
view ; it is concerned with them only in so far as they 
have a direct economic bearing. Hence the economist 
rightly neglects, or passes over very lightly, many 
phenomena, and relations between phenomena, that 
ai'e of central importance from the standpoint of other 
social philosophers, e.g., the jurist, the moralist, or 
the student of political science. " The tendency of 
scientific progress," as Cherbuliez has well remarked, 
" has always been to separate the sciences, not to 
confuse them ; to divide and subdivide the domain 
of their investigations, not to make of them a single 
field, cultivated by the same hands, following the same 
methods."^ 

It may be observed in passing that physical, as well 
as social, conditions have to be taken into account in I 
political economy. If, for instance, a rise in wages 
takes place, the possibility of its being maintained 
may depend on the effect of better food upon the 
efficiency of the workers. The law of diminishing 
return, again, has a direct physical basis ; and it is 
impossible properly to investigate the eff"ects of free 
1 Precis de la Science Ecoiioiiiiqiie, vol. 1, p. 9. 



IV.] SCIENTIFIC DIVISION OF LABOUR. 137 

trade apart from the assumption of physical differences 
between different countries. But no one therefore 
regards political economy as having no existence in- 
dependently of the physical sciences. We may argue 
further from the analogy of the physical sciences them- 
selves. For it is also true that phenomena in the 
physical world are in various ways interdependent. 
Geological phenomena, for instance, are dependent 
upon physical and chemical phenomena. But no one 
therefore denies the right of geology to be recognised 
as a distinct science. It has been truly said that in a 
sense everything includes everything else, and no doubt 
on the problem of the rent of land it might be possible 
to build up an encyclopaedia of the sciences. Never- 
theless, subdivision and specialization are necessary, if 
we are to advance in accurate knowledge. 

Granting, then, that political economy is not a 
wholly independent and isolated science, it is still to 
be regarded as a distinct division of speculative truth ; 
and it may rightly take rank as a social science marked 
off by special characteristics from other social sciences. 
It is, in other words, a science in which a form of social 
activity of a distinctive character is singled out for 
distinctive treatments 

1 It is to be observed that Dr Schonberg — who may be taken as 
representing the prevailing view of German economists — whilst fully 
recognising, and indeed insisting upon, the interdependence of economic 



138 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP. 

Even if we recognise in the most unreserved way 
that political economy is only one division or depart- 
ment of social science, there is a special reason why, 
in the present state of sociological knowledge, we 
should not seek to give economic doctrine an entirely 
new form with a view to its absorption into general 

and other social phenomena, still speaks of political economy as a 
special independent science {"eine eigene selbstnnduie Wissenschaft "). 
He gives the following as the great fundamental life spheres of every 
people, constituting, in their totality, national life : justice, art, 
science and education, family life, social life and morality, religious 
life, political life, and economic life. The last of these spheres, 
he remarks, stands in the closest causal connexion with the others ; 
it influences them, and is influenced by them. In studying it, there- 
fore, we must recognise these causal relations. But at the same time 
economic life is a distinct sphere of national life ; in it men pursue 
peculiar ends ; in it peculiar forces are developed ; it depends 
on special institutions ; into it enter peculiar problems ; and it is 
consequently the subject of an independent science. See Schonberg's 
Handbuch, vol. 1, pp. 3, 16, 17. Compare, also, Dr von Scheel in the 
same volume of the Handhnch, p. 69. " It has been proposed," 
he says, " that political economy should be enlarged into the science 
of society, while it ought only to be said of it that it should be 
enlarged into one of the social sciences — in opposition to the too 
narrow conceptions which were held formerly." Knies expresses 
himself similarly, — "One may take into consideration a science which, 
under the name of sociology or any other name, would have to set 
forth the underlying universal theory for all state and social sciences. 
But with all that, the just claim and unavoidable requirement of a 
special care for political and social economy, in the sense in which it 
is known to us, is still not in the least affected. If this branch of 
science, which has grown up with the development of the scientific 
division of labour for the special investigation of a very large and 
important sphere of human social life, were not there already, then it 
would have to be immediately invented " (Die Politische Oekoiiomie 
vovi gesehichtUchen Standpunkte, 1883, p. 9). 



IV.] POSITION OF SOCIOLOGY. 139 

sociology. Comte charged political economy with being 

radically sterile as regards results. But what results 

has sociology, conceived as a master-science dealing 

with man's social life as a whole, yet to shew ? It has 

been well said by Lord Sherbrooke that sociology, as 

distinct from the special social sciences, has yet its 

spurs to win. The time may come when in the domain 

of social science wide generalizations are established, 

from which each special science that deals with man in 

society may learn. There may thus be constituted a 

body of general sociological doctrine, to which political 

economy is subordinated. But economics cannot wait 

for sociology in this sense to be built up. "It is 

vain," says Professor Marshall, " to speak of the higher 

authority of a unified social science. No doubt if that 

existed, economics would gladly find shelter under its 

wing. But it does not exist ; it shews no signs . of 

coming into existence. There is no use in waiting 

idly for it ; we must do what we can with our present 

resources." ^ 

1 Present Position of Economics, p. 35. Dr Sidgwick in his Sco])e 
and Method of Economic Science expresses himself to a similar effect. 
He disciisses in some detail the claims of sociology to be regarded as 
a positive or established science, taking Comte's own tests of (1) con- 
sensus or continuity, and (2) prevision (p. 46) ; and on both grounds 
he decides the question in the negative. " There is no reason," he 
says in conclusion, "to despair of the progress of general sociology ; 
but I do not think that its development can be really promoted 
by shutting our eyes to its present very rudimentary condition. 
When the general science of society has solved the problems which it 



140 POLITICAL ECONOMY AND SOCIOLOGY. [CHAP. 

It may be added, partly by way of qualification, that 
there is one particular department of economic enquiry, 
in which the connexion with the general philosophy of 
society is closer than in other departments. It seems 
clear that in seeking a theory of economic progress, the 
method of specialization can be carried less far than 
when we are discussing laws that presuppose given 
conditions of industry. It is indeed possible to trace 
historically the actvial course of progress from the 
specifically economic standpoint ; and generalizations 
relating to points of detail in economic development 
are attainable apart from any general theory of social 
progress. But since it is admitted that the economic 
conditions of any given stage in the progress of society 
are determined not merely by the economic conditions, 
but by the general social characteristics, of the pre- 
ceding stage, no theory of the tendencies of economic 
evolution as a whole seems likely to be reached in- 
dependently of some theory of the general tendencies 
of social development. 

has as yet only managed to define more or less clearly — when for 
positive knowledge it can offer us something better than a mixture 
of vague and variously applied physiological analogies, imperfectly 
verified historical generalisations, and unwarranted political pre- 
dictions — when it has succeeded in establishing on the basis of 
a really scientific induction its forecasts of social evolution — 
its existence will be irresistibly felt throughout the range of the 
more special enquii-ies into different departments of social fact " 
(pp. 55, 56). 



IV.] THEORY OF ECONOMIC PROGRESS. 141 

It is from the department of economic progress 
that those who attack the old political economy draw 
their most forcible illustrations; and it is further to 
be observed that as general sociology is frequently 
conceived, its one fundamental problem is " to find the 
laws according to which any state of society produces 
the state which succeeds it and takes its place." ^ 
When sociology, as thus interpreted, can lay down 
propositions that are definitely formulated and clearly 
established, then the theory of economic progi'ess may 
with advantage be specially subordinated to it. 

1 J. S. Mill, Logic, vol. 2, p. 510. 



NOTES TO CHAPTER IV. 

A. On the Distinction between Abstract and 
Concrete Political Economy. 

The discussion in the preceding chapter naturally leads 
to the recognition of two stages in economic doctrine, which 
may be called the abstract and the concrete stage respec- 
tively \ In the abstract or pure theory of political economy 
we concern ourselves entirely with certain broad general 
f" principles irrespective of particular economic conditions ; 
or, as Jevons puts it, with " those general laws which are 
so simple in nature, and so deeply grounded in the con- 
stitution of man and the outer woi'ld, that they remain 
the same throughout all those ages which are within our 
consideration." The method of the abstract theory is al- 
most wholly deductive and hypothetical ; for though based 
ultimately on observation, it works from artificially si mplifie d 
data. The results obtained are in one sense of universal 
application, since they are ready to be modified to suit 
particular circumstances as the occasion may arise ; but 
they are in themselves always incomplete, since we cannot 
by their aid alone adequately understand the economic 
phenomena of actual life. 

^ Compare Jevons on The Future of Political Ecoiwmy in the 
Fortnightly Review for Novecnber, 1876, p. 625. 



NOTE A.] ABSTRACT AND CONCRETE ECONOMICS. 143 

Concrete economics comes in to supplement the pure 
theory, and is not content with merely hypothetical results. 
Its laws are obtained either by direct generalization from 
experience, or by the aid of the deductive method. In 
the latter case, however, the premisses are adapted to suit 
special circumstances, and both premisses and conclusions 
> are constantly tested by direct appeals to experience. In 
formulating concrete economic doctrines we seek to lay 
down laws that are operative over a given period or in a 
given state of society. Such laws are for the most part 
relative, not universal, in their application'. 

We have the pure theory par excellence, when we 
concern ourselves with economic men, supposed to deal 
exclusively with one another in a state of economic free- 
dom. On this basis the laws of competitive values, wages, 
rent, interest, &c. are worked out in their most general 
and abstract forms. Jevons's Theory of Political Economy 
may be given as a typical example of an abstract treat- 
ment of the subject, as contrasted with such a work as 
Walker's Wages Question, where the treatment is in the 
main concrete. 

The line between abstract and concrete political economy 
hardly admits, however, of being rigidly determined ; for 
the extent to which we have in view special circumstances 
and conditions of society may sometimes be a matter of 
degree. Even the same doctrine {e.g., the doctrine of cost 
of production as the regulator of value) may be regarded 

1 What is here spoken of as concrete economics has sometimes 
been called applied economics. As already pointed out, however, the 
latter designation is ambiguous; and on the whole it seems best to 
keep it for what is also called the art of political economy. 



\ 



144 ABSTRACT AND CONCRETE ECONOMICS. [CHAP, IV. 

as having an abstract or a concrete character according! to 
the mode in which it is treated ; and in some cases the 
concrete doctrines are just the abstract doctrines plus some- 
thing more, namely, an enquiry into the special conditions 
under which alone the latter can be applied to existing 
facts, and an investigation of the modifications of doctrine 
needed in consequence thereof. Instead, therefore, of at- 
tempting to draw any hard and fast line between the two sets 
of doctrines, it may be better to say simply that political 
economy is abstract in so far as it neglects special conditions 
, of time, place, and circumstance ; while it becomes more 
and more concrete as it takes such conditions into account. 
This relativity does not detract from the importance of the 
distinction, which is of special utility in relation to problems 
of method. 

It should be added that the manner in which the dis- 
tinction is here expressed, and even the distinction itself, 
would not be universally accepted. For, as we have seen, 
some economists practically deny the possibility, or at any 
rate the utility, of any abstract or hypothetical treatment 
of economics at all, while others seem to regard the pure 
theory as exhausting economic science. An endeavour has 
been made in the preceding chapter to controvert both 
these views. The pure theory may rightly be regarded as 
of great and even indispensable value as the general basis 
of economic reasoning, while it is at the same time held to 
be only part of a larger whole. 

It may, indeed, sometimes be possible to pass im- 
mediately from the pure theory to the interpretation of 
individual phenomena of the actual economic world ; but 
more usually there is required the intervention of a body 



n 



NOTE A.] ABSTRACT AND CONCRETE ECONOMICS. 145 

of doctrine, whichj while possessing a certain generality of 
form, is still not purely abstract in character, or capable 
of being worked out merely by the aid of those simple and 
general data, which alone are recognised by the abstract 
theory. It is this body of doctrine that constitutes concrete 
political economy, as broadly distinguished from the pure 
theory of the science. 

The reasoning of the abstract theory has a logical 
precision which concrete economics for the most part lacks. 
Being hypothetical it can be made demonstrative and 
necessary, so that among properly trained persons there 
should be no room for differences of opinion in regard to 
its conclusions. Concrete economic doctrines are in com- 
parison contingent and indeterminate. But it does not 
follow that they therefore form no part of the science, or 
that they are essentially unscientific and untheoretical. It 
ought frankly to be recognised that not all science is of 
the demonstrative type ; and it would .be a great mistake 
to narrow our conception of political economy to the pure 
theory alone, simply in order to attain perfection of logical 
form. 



• B. On the Distinction between the Statics 
AND THE Dynamics of Political Economy. 

In speaking in the preceding chapter of the laws of 
economic progress, another subdivision of political economy 
has been indicated, about which a few more words may 
here be added. Economic doctrines may treat (a) of the 
phenomena of wealth as they present theraselves under 

K. 10 



146 ECONOMIC STATICS AND DYNAMICS. [CHAP. IV. 

given economic conditions ; or (6) of the manner in which 
these conditions themselves vary over long periods of 
time, together with the economic changes that ensue there- 
upon. 

The former of these branches of enquiry constitutes the 
main body of economic science. To it belongs, for example, 
the investigation of the laws which in any given society 
regulate the division of what is produced into the shares of 
rent, interest, and earnings. The latter branch of enquiry 
may be distinguished as the study of economic progress ; and 
the resulting doctrines constitute in their totality a general 
theory of economic development or evolution. The laws of 
the movement from status to contract, and of the transition 
from collective to individual property, may be given as 
examples of special doctrines belonging to this division of 
the subject. 

Using terms which Comte introduced into the nomen- 
clature of social science, Mill and some other economists 
speak of these two branches as the statics and dynamics 
of political economy respectively. These terms are not, 
as a matter of fact, specially appropriate ; they may even 
be misleading. In so-called economic statics we are fre- 
quently engaged in examining the effects of particular 
changes, e.g., changes in demand, in cost of production, in 
the amount of currency in circulation, and the like. The 
economic world, even in a given state of society, is in 
perpetual movement ; prices, wages, profits, systems of cur- 
rency, tariffs, &c. are continually changing ; and it is the 
business of political economy, independently of any theory 
of economic progress, to investigate the mutual relations of 
these changes. 



NOTE B,] ECONOMIC STATICS AND DYNAMICS. 147 

Apart, however, from the use of these particular terms, 
there can be no doubt of the importance of the distinction 
itself, especially in the discussion of economic method. The 
theory of economic progress is exceptional in its almost 
entire dependence upon an historical method of treatment ; 
and, as pointed out in the preceding chapter, it is more 
distinctlj^ subordinate than are other portions of economic 
doctrine to general sociology. Some members of the histo- 
rical school consciously or unconsciously identify the study 
of economic development with political economy as a whole, 
or at any rate regard it as the only portion of political 
economy worthy of scientific treatment. The relative value 
that they attach to the historical method in economic in- 
vestigations is consequently very great, and the nature of 
their disagreement with other economists is somewhat apt 
to be misunderstood. 

It should be added that the expressions statics and 
dynamics of political economy are also used to indicate a 
distinction of a somewhat less thoroughgoing character 
than that described above. An economic theory is termed 
static if it is based on the assumption of what has been 
called a stationary state, that is to say, a state in which 
there occurs no essential modification of the general con- 
ditions under which production and consumption, distribu- 
tion and exchange, are carried on. In other words, in a static 
enquiry, the efiects of changes of a certain specific kind are 
considered, but the general social and economic conditions 
are supposed fixed ; it is assumed that no fundamental 
changes take place in the general character of social wants, 
that no inventions lead to the introduction on a large scale 
of new methods of production, that no sudden diminution 

10—2 



148 ECONOMIC STATICS AND DYNAMICS. [CHAP. IV. 

of population is caused by war or famine, that there is no 
progressive exhaustion of sources of supply, and so forth. 
At a later stage it becomes necessary to consider the effects 
of such changes as these, and we then pass on to the 
dynamics of the subject. It will be observed that what is 
here meant by the dynamics of political economy amounts to 
something less than a general theory of economic evolution. 

The distinction between statical and dynamical theories 
as here drawn is a relative rather than an absolute one. 
Still what lies at the root of the distinction is of consider- 
able importance, especially from the methodological point 
of view ; and it is also important to recognise the true 
nature of the relation between the two kinds of enquiry. 
The static, as distinguished from the dynamic, treatment 
of any problem involves a higher degree of abstraction ; 
and the justification for such a treatment is to be found 
in the gain in clearness and precision that results from 
commencing our study of the operation of economic forces 
by considering them as far as possible in isolation and not 
in combination. Our problems are thus simplified and we 
take them first of all in a form in which they admit of a 
definite and precise solution. As in other cases, however, 
where we make use of abstraction, the statical treatment 
is not final ; and it should be supplemented by a less 
abstract treatment wherever this is possible. 

Professor Marshall has some interesting observations 
on the importation of the terms statics and dynamics from 
physics into economics. He allows that there is a fairly 
close analogy between the earlier stages of economic 
reasoning and the devices of physical statics ; but he con- 
siders that dynamical solutions, in the physical sense, of 



NOTE B.] ECONOMIC STATICS AND DYNAMICS. 149 

economic problems are unattainable. He thinks that in 
the later stages of economics biological analogies are more 
serviceable than mechanical ones ; and hence that while 
economic reasoning should start on methods analogous to 
those of physical statics, it should gradually become more 
biological in tone. In other words, economic problems 
as they grow more complex are less concerned with the 
interaction of forces, regarded as merely mechanical in 
their operation, and are more concerned with organic life 
and growth'. This accords with the view that we have 
elsewhere expressed that when we come to deal with 
problems of economic growth and pi'ogress the appropriate 
method becomes less and less deductive and more and 
more inductive. For it is to be observed that mechanical 
analogies (dynamical as well as statical) naturally suggest 
deductive methods of investigation, while biological and 
evolutionary analogies suggest inductive methods. 

C. On Political Economy and Common Sense. 

The point of view of Comte and his school is not the 
only one from which the claims of political economy to be 
regarded as a science have been denied. For the paradox is 

1 Thus, " in the earlier stages of economics, we think of demand 
and supply as crude forces pressing against one another, and tending 
towards a mechanical equilibrium ; but in the later stages, the balance 
or equilibrium is conceived not as between crude mechanical forces, 
but as between the organic forces of life and decay.... Again, with 
everj' spring the leaves of a tree grow, attain full strength, and after 
passing their zenith decay ; while the tree itself is rising year by year 
to its zenith, after which it also will decay. And here we find a 
biological analogy to oscillations in the values of commodities or of 
services about centres which are progressing, or perhaps themselves 
oscillating in longer periods " (Economic Journal, March 1898, p. 43). 



150 POLITICAL ECONOMY AND COMMON SENSE. [CHAP. IV. 

sometimes maintained that economic problems can best be 
solved by common sense, that is, by the natural untrained 
intelligence and sagacity of the plain unscientific man ; and 
it is accordingly considered a mistake even to attempt to 
give economic reasonings a scientific form\ 

The question at issue resolves itself to a certain extent 
into what is meant by science and scientific. E"en those, 
who deny that political economy is a science, admit that it 
proceeds by systematic observation and analysis, and that 
it i-esults in a body of ascertained and reasoned truth. But 
this is little different from what others mean by calling it 
a science. A science may be defined as a connected and 
systematized body of truths possessing generality of form. 
Truth lacking generality cannot constitute a science ; nor 
can even general laws so long as they remain detached and 
disconnected. In maintaining, then, the possibility of a 
science of political economy, nothing more is meant than 
that it is possible to discover general laws of economic 
phenomena, to co-ordinate these laws, and to explain 
particular economic facts by means of them. 

In so far as the possibility of an economic science in 
this sense is not denied, the question resolves itself into one 
of wa3''s and means of attaining the desired end ; and we 
may here consider very briefly one or two of the arguments 
put forward in favour of having recourse to what is called 
a practical as opposed to a scientific method. 

A scientific treatment of political economy is deprecated, 

^ See Professor Bonamy Price's Practical Political Economy, 
Chapter i. ; also his address as President of the Department of 
Economy and Trade, Social Science Congress, 1878, published in the 
Joxirnal of the Statistical Society, December, 1878. 



I 



NOTE C] POLITICAL ECONOMY AND COMMON SENSE. 151 

because political economy addresses an unscientific audience 
and is bound to make itself easy to be understood. " Its 
aim is to make common sense the supreme ruler of industry 
and trade. The test of a true political economy is that its 
teaching, its principles, its arguments, and above all its 
'language, shall be intelligible to all." It is, in other words, 
maintained that the economist must not be scientific, be- 
cause if he is he will be over the heads of his audience. Of 
course abstruse reasoning is out of place if simpler reasoning 
will serve the purpose equally well ; and technicalities, that 
can without loss of precision be avoided, condemn them- 
selves. But to make intelligibility to the ordinary untrained 
understanding the actual test of truth is simply to pave the 
way to error. 

It is needless to say that in dealing with economic 
problems there is ample scope within legitimate limits for 
the exercise of sound common sense. Common sense, or 
at any rate common experience, supplies the economist 
with many of his ultimate premisses; and, in regard to 
practical questions where there is much to be said on both 
sides, common sense is often in the last resort the supreme 
arbiter to be appealed to'. In dealing with subject-matter 
so complex as that of political economy, however, it shews 
the reverse of true common sense to reject any of the aids 
that systematic methods of observation and reasoning can 
afibrd ; and, all things considered, it is not an unqualified 
disadvantage that the use and proper appreciation of such 
methods shoidd necessitate some preliminary Jraining^of 

1 It may be said that common sense of the kind here had in view 
belongs to a somewhat rare type ; still it is entitled to the name of 
common sense, in so far as it is hardly amenable to scientific rule, 
and is not to be acquired by scientific training. 



152 POLITICAL ECONOMY AND COMMON SENSE. [CHAP. IV. 

a scientific sort. The concrete facts of economic life are 
so familiar, that men are only too ready to imagine them- 
selves competent to form sound judgments in regard to 
them. It is, therefore, the more important that the need 
of scientific training in methods of economic analysis and 
reasoning should receive general recognition. It has been 
said that political economy is losing its influence because 
it is becoming too scientific. It should rather be said that 
its scientific pretensions have sometimes been misunder- 
stood and exaggerated, because the limitations to which it 
is subject, when treated as an exact science, have been 
overlooked. But liowever much the ci'edit of political 
economy may have suffered from this cause, it has certainly 
suffered a good deal more from the crude dogmatism of those 
who have professed to speak in its name, although they 
have received no adequate scientific training in its study, 
A further reason assigned for holding that political 
economy should not arrogate to itself the name of science 
is that " the truths proclaimed by it are ultimately truisms, 
which have always been known to all the world." In so 
far as this statement is true, it is a statement that does 
not apply to political economy alone. Most scientific laws 
include facts that have been known all through the ages ; 
but they are far from being a bare restatement of these 
facts. The relation of science to everyday truths is that 
it examines their logical foundations and gives them a 
precise form, corrects and supplements them, explains tliem 
by means of higher generalizations, and so systematizes and 
co-ordinates them. To do all this for such economic truths 
as are already the common property of mankind is one of 
the aims of political economy. 



CHAPTEH V. 

ON DEFINITION IN POLITICAL ECONOMY. 

§ 1. The problem of definition in political economy. — 
All writers on the method of science, from Bacon down- 
wards, have in some form or other called attention to 
the importance of the part played by the explication 
of conceptions in the building up of any science ; and 
it is certainly not less essential in economics than in 
other sciences that our fundamental notions should be 
made clear. This end is effected chiefly by discussions 
concerning definitions. 

There are some writers who decry all attempts to 
frame accurate definitions of economic terms. Such 
attempts are viewed with suspicion ; they are regarded 
as throwing dust in the eyes of the student, and as 
diverting his attention from more important points. 
Political economy is said to have strangled itself with 
definitions. Richard Jones, for example, who is known 
chiefly as one of the earliest critics of the Ricardian 
school, and who was also one of the first to emphasize 
the relativity of economic doctrines, speaks with much 



154 DEFINITION IN POLITICAL ECONOMY [CHAP. 

scorn of those who would spend time in discussing 
definitions. '"' I have been reproached," he says, " with 
giving no regular definition of rent. The omission 
was not accidental. To begin, or indeed to end, an 
enquiry into the nature of any subject, a circumstance 
existing before us, by a definition, is to shew how little 
we know how to set about our task — how little of the 
inductive spirit is within us."^ Comte writes in a 
similar strain, and so do some members of the modern 
historical school. They regard disquisitions on the 
meaning of terms as pedantic and useless, even if not 
positively misleading-. In all this, there is an element 
of truth. Mere definition carries us a very little way ; 
and to bind ourselves by rigid definitions, or even to 
attempt perfect consistency in the use of terms, may 
sometimes — for reasons that will presently be stated — 
hinder rather than advance scientific knowledge. Still, 
while excessive wrangling as to the meaning of words 
is to be avoided, the fundamental importance of dis- 
cussing definitions in a really scientific way remains. 
It may be observed, in the first place, that if some 
economists waste time by treating problems of definition 

1 Literary Tiemains of Richard Jones, edited by Whewell, p. 598. 

^ " Word-splitting and definition-extending," says Professor Thorold 
Eogers, " is a most agreeable occupation. It does not require know- 
ledge. It is sufficient to be acute. Persons can spin out their 
definitions from their inner consciousness by the dozen, aye, and 
catch the unwary in the web " [Economic Interpretation of History, 
p. viii). 



v.] NOT A MERE QUESTION OF LANGUAGE. 155 

in too great detail, others waste more time in verbal 
disputes unrecognised as such. Failing to give pre- 
cision to their own use of terms, and failing also to 
appreciate the sense in which the same terms are used 
by other writers, they fall easily a prey to the fallacy 
of ignoratio elenchi. Much controversy in economics 
might be avoided by a clear understanding of the 
different senses in which terms are used, and the 
relation of the different meanings one to another. 

But it should always be remembered that the 
problem of definition, properly understood, is something 
more than a mere question of language. " Definitions," 
says Mill, " though of names only, must be grounded 
on knowledge of the corresponding things." In the 
discussion of a definition, insight is often gained into 
matters of fact ; and, as Dr Sidgwick has insisted 
in a highly philosophic passage in his Principles of 
Political Economy, the discussion itself may be of 
much greater importance than the particular definition 
finally selected. Economists, Dr Sidgwick observes, 
have been apt to " underrate the importance of seeking 
for the best definition of each cardinal term, and to 
overrate the importance of finding it. The truth is — 
as most readers of Plato know, only it is a truth difficult 
to retain and apply — that what we gain by discussing 
a definition is often but slightly represented in the 
superior fitness of the formula that we ultimately 



156 DEFINITION IN POLITICAL ECONOMY, [CHAP. 

adopt ; it consists chiefly in the greater clearness and 
fulness in which the characteristics of the matter to 
which the formula refers have been brought before the 
mind in the process of seeking for it."^ In choosing one 
definition of a term rather than another, there is not 
unfrequently something arbitrary; and so long as all 
sources of ambiguity and vagueness are cleared away, it 
may not, within certain limits, be of essential importance 
which of two or more alternatives is adopted. But 
there is nothing arbitrary or unessential in analysing 
the precise content of a notion in the various con- 
nexions in which it is involved. In such an analysis, 
it is generally assumed either that the extension of 
the notion is more or less agreed upon, or else that 
some proposition into which the notion enters is true. 
In analysing, for instance, the conception of capital it 
is usually taken as granted that capital is one of the 
co-operating factors in the production of wealth. Our 
economic notions are thus no mere fictions of the 
imagination, but are drawn from the facts of industry 
and commerce that have come under our notice ; and 
their analysis fixes our attention on distinctions and 
relations of fact. 

It is unnecessary to insist on the impossibility of 
gaining, without clear notions, an accurate knowledge 
of the things themselves to which the notions relate. 
1 Principles of Political Economy, 1901, p. 59. 



v.] ERRORS DUE TO ILL-DEFINED NOTIONS. 157 

In economics, numerous errors have been the result of 
vague and ill-defined notions ; and in consequence of 
the complexity of economic phenomena, the attainment 
of clear ideas in this department of knowledge is 
undoubtedly attended with peculiar difficulty ^ This 
is one reason why the problem of definition assumes 
a greater relative importance in economics than in 
some other studies. It is, as we have said, by dis- 
cussing definitions that we are aided in making our 
ideas clear; and our success in framing satisfactory 
definitions may also be taken as a test of their 
clearness^. 

The assistance afforded by the discussion of 
definitions towards the explication of fundamental 

^ Fallacious theories of wages— to take but one example — may be 
at least partly ascribed to the difficulty that has always been found in 
precisely analysing the conception of capital, and keeping clearly 
before the mind the result of that analysis. 

- Whewell remarks that "though definition may be subservient to 
a right explication of our conceptions, it is not essential to that pro- 
cess. It is absolutely necessary to every advance in our knowledge, 
that those by whom such advances are made should possess clearly 
the conceptions which they employ : but it is by no means necessary 
that they should unfold these conceptions in the words of a formal 
definition" {Novum Organon Renovatum, p. 38). It is quite true 
that it is possible to have clear notions without definitions clothed 
in definite language. We have, for example, a clear conception of 
capital, if we can analyse with precision and accuracy the functions 
of capital in industry ; and it is not absolutely essential to this, that 
an exact definition of capital should be constructed. At the same 
time, the ultimate test of the clearness of any conception would seem 
to be the ability to express in clear and definite language the corre- 
sponding definition. 



158 DEFINITION IN POLITICAL ECONOMY. [CHAP. 

conceptions is not, however, the only reason why the 
problem of definition is important. All definition in- 
volves classification. By giving a name to phenomena 
of a certain description we thereby constitute them a 
class by themselves; and it is of great scientific moment 
that we should bring together into the same category 
those things which have from the economic standpoint 
the closest affinity one to another, and that we should 
not class together those things whose resemblance is 
only superficial and unimportant. For this reason, it is 
after all only within certain limits that it can be said 
to matter little what precise definitions of economic 
terms are ultimately selected. Our aim should always 
be to i"ender our terms significant of those distinctions 
that are from the economic point of view of principal 
importance. Only by the aid of an appropriate no- 
menclature will it be possible without circumlocution 
to formulate exact general statements concerning the 
phenomena of wealth. 

From this point of view the problem of definition 
resolves itself into one of classification ; and it is again 
made clear that definition is not a mere question of 
words, but a question of things. The truth is that 
the discussion of definitions in political economy — so 
far from requiring, as Professor Thorold Rogers says, 
no knowledge, but only acuteness — requires, if it is to 
be carried on to any useful purpose, wide experience 



v.] PLACE OF DEFINITION IN A SCIENCE. 159 

and a thorough knowledge of economic phenomena 
and their mutual relations. In the order of exposition, 
some consideration of definitions naturally finds an 
early place. But in the order of knowledge, finality 
of definition is attained only in a late stage of develop- 
ment. " The writers on logic in the middle ages," 
says Whewell, " made definition the last stage in the 
progress of knowledge ; and in this arrangement at 
least, the history of science, and the philosophy derived 
from the history, confirm their speculative views." ^ 
From this standpoint, Adam Smith has been praised 
for the very sparing way in which he introduces de- 
finitions in the Wealth of Nations. 

§ 2. Conditions to he satisfied in framing economic 
definitions. — It follows from what has been said in the 
preceding section that the main objects to be kept in 
view in discussing and framing definitions in political 
economy are — (1) to make as distinct and precise 
as possible the conceptions that are fundamental in 
the science, (2) to mark those distinctions between 
phenomena that are of chief economic importance. 
In other words, our aim should be to make our ideas 
at once clear and appropriate. It is hardly necessary 
to add that we should seek to express our definitions 
in a simple and intelligible form. There remain to 
be considered some special difficulties that present 
1 Novum Organon Renovatum, p. 40. 



160 DEFINITION IN POLITICAL ECONOMY. [CHAP. 

themselves in the attempt to frame satisfactory eco- 
nomic definitions. 

Because economics is concerned with familiar phe- 
nomena of everyday life, and because of the precedent 
set by the great economic writers of the past, econo- 
mists have for the most part to content themselves 
with terms that are already in current use in ordinary 
discourse. There is some gain in this. Words borrowed 
from common language are, as Whewell points out, 
" understood after a very short explanation, and re- 
tained in the memory without effort." But, at the 
same time, the problem of definition is made more 
difficult. For if we use the terms of common language, 
we must also endeavour to keep tolerably near to the 
sense in which they are customarily employed. In so 
far as this condition is not fulfilled, there is not only 
danger of our being misunderstood by others, but, as 
Dr Sidgwick remarks, we may also fall into inconsistency 
ourselves through the force of old associations and the 
effect of habit on our own minds. Unfortunately, 
the terms of ordinary language have not, as a rule, 
any precisely determined connotation ; they are used 
vaguely and inconsistently. The distinctions indicated 
by them, moreover, are by no means always those whicK^ 
from the economic standpoint are of chief importance. 
Hence arises a frequent conflict between the condition 
that we are so to define our terms that the ideas 



v.] EMPLOYMENT OF TERMS IN ORDINARY USE. 161 

corresponding to them may be both clear and appro- 
priate, and the further condition that we are to seek, 
as Malthus puts it, " to agree with the sense in which 
they are understood in the ordinary use of them in 
the common conversation of educated persons."^ What 
then is the relative importance of these conditions ? 
Some writers regard agreement with common usage as 
the ultimate and supreme test. So far, they consider, 
as we depart from the sense in which a term is used 
in common life, we necessarily fail in solving the 
problem of its best definition. In other words, the 
enquiry as to what a term ought to mean in political 
economy is practically identified with the enquiry as 
to its actual meaning in ordinary discourse. 

In opposition to the above, the true solution seems 
to be as follows. In defining our terms, we should begin 
with a kind of Socratic induction, and enquire what 
is the main idea running through their ordinary use 
both in everyday discourse and in economic writings. 
Besides enabling us to minimise the divergence be- 
tween our definitions and the current meaning of 
the terms defined, a study of the traditional use of 
language is likely to suggest both similarities and 
distinctions that might otherwise have escaped our 
notice. From this point of view, even the ambiguity 
of a term may not be without a certain compensating 
1 Definitions in Political Economy, p. 4. 
K. 11 



162 DEFINITION IN POLITICAL ECONOMY. [CHAP. 

advantage ; for by enquiring into the source of the 
ambiguity we may gain light on the connexion between 
the phenomena denoted b}^ the term in its two senses 
respectively ^ Still, however important the enquiry 
into the current use of language may be, it ought 
not to be regarded as identical with the problem of 
determining what is the best definition to select for 
scientific purposes ; and while agreement with oi'dinary 
usage is to be sought for, this aim must always be sub- 
ordinated to the attainment of clear and appropriate 
conceptions. Hence, some deviation from the colloquial 
use of terms may ultimately be found inevitable. It 
need hardly be said that whenever we thus find our- 
selves compelled to employ an old term in a new and 
technical sense, we should spare no pains in empha- 
sizing our divergence from previous usage. 

A word or two may be added with regard to 
the frequent diversity in the use of terms amongst 
economists themselves. This diversity leads sometimes 
to misunderstanding, and probably tends to retard the 
progress of the science ; it is, therefore, to be regretted ; 
but we should not attach undue importance to it. 
Divergence iij regard to questions of definition does 

^ Thus — to take a simple illustration — the ambiguity of the term 
value leads up to a discussion of the relation between exchange- value 
and utility. Again, the ambiguity of the expression i-alue of money 
suggests the enquiry how changes in the general purchasing power of 
money are related to changes in the rate of discount. 



v.] CRITICISM OF DEFINITIONS. 163 

not necessarily preclude substantial agreement either 
in the ultimate analysis of fundamental conceptions 
or in completed doctrine ; and the conclusions of any 
given economist may have intrinsic value, although he 
is paradoxical in his phraseology. Moreover, where 
there is a want of agreement in definition, valuable 
lessons may sometimes be learnt from a study of its 
causes. Two different definitions of the same term| 
may be complementary to one another, in the sense 
that each lays stress on some distinction that the 
other tends to slur over. And thus the criticism of 
definitions that are ultimately rejected may be by no 
means barren of result. 

It will be gathered from what has been already said 
that in advocating one definition of a term rather than 
another, dogmatism is generally speaking out of place. 
Advocates of particular definitions are, however, far too 
apt to dismiss rival definitions as simply erroneous, not 
recognising that the question is usually one of degree 
of appropriateness, rather than of absolute right or 
wrong. It may for this reason be useful very briefly 
to consider the various grounds on which any proposed 
definition may be criticized and rejected. (1) That it is 
based on an erroneous analysis of facts. The real ground 
of a criticism of this kind is an underlying assumption, 
on the part of the framer of the definition, either that 
the denotation of the term is more or less fixed, or 

11—2 



164 DEFINITION IN POLITICAL ECONOMY. [CHAP. 

else that some given proposition in which the term 
occurs is true. We have ah'eady pointed out that such 
assumptions as these do frequently underlie proposed 
definitions ; and it is clear that any resulting con- 
troversy must turn on matters of fact, and not merely 
on questions of propriety of language or classification^. 
Whenever, therefore, such criticism can be shewn to 
be valid, the critic may rightly claim to be allowed to 
express dissent dogmatically. (2) Unintelligihility or 
obscurity. This again is a ground of criticism which, if 
it can be made good, justifies an unqualified rejection. 
(3) Unsuitahility. Here the basis of the criticism is that 
the classification implied by the definition is not one 
that is suitable or convenient for economic purposes. 
The unsuitahility or inconvenience may of course be 
of an extreme and patent character ; but frequently 
it is merely a question of degree, or of a balance of 
advantage and disadvantage, in regard to which a 
writer may have his own opinion, but should also be 
content to let others have theirs, without adopting a 
violently controversial tone. For so long as econom- 
ists agree in their fundamental analyses, a difference 

1 If, for instance, it is assumed that the normal value of freely 
produced commodities is determined by their cost of production, then 
the definition of cost of production involves questions of fact. Simi- 
larly, if in defining wealth, it is assumed that whatever can be bought 
and sold is wealth ; or if in defining a market, it is assumed that the 
Money Market is properly so called. 



v.] CRITICISM OF DEFINITIONS. 165 

between them as to the precise point at which classes 
should be separated from one another may be a matter of 
comparative indifference. (4) Departure frotn popular 
or previous economic usage. There are here three cases 
which may be distinguished, (a) Where the writer 
intends to define the term in the popular or the usual 
economic sense, but fails to do so correctly. This is 
a valid ground for speaking of a definition as incorrect. 
(h) Where the writer is aware that he is departing from 
ordinary usage, but in his own subsequent use of the 
term unconsciously drops back into the old meaning. 
The charge here is one of internal inconsistency; and if 
it can really be shewn that the force of old associations 
is such that the very framer of the new definition is 
misled by them, it is a fair ground for rejecting the 
definition summarily, (c) Where the writer is aware 
that he is departing from ordinary usage, and is not 
open to the charge of inconsistency. Under these 
conditions, novelty of definition may be perfectly 
justifiable; and in no case does it afford ground for 
any accusation of positive error or incorrectness. The 
disadvantages of using terms in a novel sense are, 
however, obvious and indisj)utable ; and the proposed 
innovation may be paradoxical in so high a degree 
that it stands for practical purposes self-condemned. 
Even short of this, a valid and sufficient ground for 
rejecting a proposed definition will be afforded if it can 



166 DEFINITION IN POLITICAL ECONOMY. [CHAP. 

be shewn that the definition involves a paradoxical 
use of language that is unwarranted by the necessities 
of the case. 

§ 3, Relativity of economic definitions. — A serious 
difficulty in the definition and use of economic terms 
results from the fact that, in different departments of 
economic enquiry, it may be convenient to vary the 
point at which distinctions are drawn. In other words, 
a conception, which is appropriate from a given stand- 
point, may need to be modified, if it is to continue 
appropriate as the standpoint is changed. This has 
been held to be the case in regard to such conceptions 
as wealth and capital : from the point of view of 
production, for example, it may be convenient to give 
a definition of wealth, not in all respects identical with 
the definition that is appropriate from the standpoint 
of distribution ; again, with special reference to its 
measurement, there may be advantages in defining 
wealth differently from the cosmopolitan, national, 
and individual points of view respectively. How then 
are conflicting requirements to be satisfied ? One 
possible solution would be the introduction of fresh 
technical terms. A great multiplication of technical 
terms is, however, in itself an evil, since it tends to 
restrict the study of the science. Moreover, to have 
entirely distinct names for conceptions that are closely 
related to one another might lead to the disregard 



v.] RELATIVITY OF ECONOMIC DEFINITIONS. 167 

of important relations and resemblances. The original 
terms might, again, be rigidly defined, careful qualifi- 
cations being introduced to fit them for use in different 
connexions ; but this would give rise to the necessity 
of very cumbrous and involved statements. A third 
alternative is frankly to allow the use of the same 
term in slightly different senses, according to the 
department of the science under discussion; and to 
vary the definition accordingly. 

This last alternative has a great weight of authority 
in its favour; and, where the differences of meaning 
are really inconsiderable, it seems an admissible course 
to adopt, on the ground that the context will generally 
speaking suffice to mark the precise sense in which 
the term is being used in any given instance. It is 
an essential condition, however, that the fact of varia- 
tion in the use of the term should be very carefully 
emphasized. In some cases, it may be possible to 
combine the first and third alternatives by forming a 
series of compound words, in which the term conveying 
the central conception remains unchanged. Thus, if 
it is thought desirable to define capital differently from 
the point of view of the individual and that of the 
community, the terms revenue-capital and production- 
capital may be used accordingly. By this plan all 
danger of ambiguity will be avoided, while at the 
same time the common element running through the 
different uses of the term will not be concealed from 



168 DEFINITION IN POLITICAL ECONOMY. [CHAP. 

view. It will probably not be necessary to use the 
full compound word on all occasions. 

It is to be added that definitions may be relative 
not only to different standpoints, or different depart- 
ments of economic enquiry, but also to different periods 
of economic development ; for at each new stage of 
economic progress, fresh characteristics of phenomena 
denoted by the same name may rise into prominence. 
In order, for example, to meet the circumstances of 
modern trade and financial organization, money requires 
a different definition from that which is appropriate to 
it in relation to earlier periods of industrial evolution. 
Again, a definition of the term market, that would be 
appropriate under the primitive conditions of the 
Middle Ages, would hardly be adequate under the 
more complex conditions of modern industry. As re- 
flecting the characteristics of different periods, and 
as illustrating the different stages through which 
phenomena have passed, the actual history of the use 
of terms is worthy of special study ^ 

1 Compare Cunningham, Growth of English Industry and Com- 
merce during the Earhj and Middle Ages, p. 17. "In the sixteenth 
century," says Dr Cunningham, "the change in the use of certain 
terms is very remarkable ; and if we attend to it, we are enabled to 
reahse the extraordinary transformation which was then taking place. 
A social change may be said to have been completed when it found 
expression in a new term, or fixed a new connotation on an old one." 
The use of aij historical method of definition is advocated by Pro- 
fessor Nicholson in his address on Political Economy as a Branch of 
Education. 



v.] RELATIVITY OF ECONOMIC DEFINITIONS. 169 

Whilst, however, many economic definitions may 
be allowed to possess a relative or progressive character, 
this relativity cannot be extended to the ultimate 
analysis of the fundamental conceptions of the science. 
If these conceptions assume a somewhat different 
character in different connexions, we shall still find 
something generic or universal in each one of them. 
Hence the admission of the relativity of economic 
definitions must not be absolute or unqualified. 

Attention may further be called to a difficulty, 
which political economy — in common with many other 
sciences — frequently finds in applying its definitions. 
Limiting cases are met with, which it is far from 
easy to assign to their proper category. This re- 
mark applies pre-eminently to such distinctions as 
those between specialized and non-specialized capital, 
skilled and unskilled labour, productive and unproduc- 
tive consumption, &c., where the two classes almost 
necessarily shade into one another by insensible 
degrees. But even in dealing with such conceptions 
as wealth, capital, money, direct and indirect taxation, 
protection to native industry, and so on, there is 
often the greatest difficulty in so formulating their 
definitions as to leave no doubt in any case as to 
whether given phenomena come under them or not. 
For instance — Is skill to be included under wealth, 
or is the goodwill of a business, or a merchant's 



170 DEFINITION IN POLITICAL ECONOMY. [CHAP. 

credit ? Where precisely shall we draw the dividing 
lines between capital and land on the one hand, 
and labour on the other ? Are bills of exchange 
to be included under money ? Is a tax on wages 
indirect because by checking the supply of labour 
it may lower profits ? Is an import duty on tea 
in England protective because it may cause some 
persons to consume more beer or other home-made 
drinks ? 

It is desirable that in the construction of defi- 
nitions, difficulties of the above kind should not be 
overlooked ; but it is nevertheless no fundamental 
objection to a definition that it does not enable them 
to be solved offhand. If in the definition itself it is 
sought to meet all limiting cases that may arise, the 
resulting formula is likely to prove very cumbrous, 
or more probably the attempt to obtain a definite 
formula at all will finally be given up as hopeless. 
But to conclude a discussion concerning the definition 
of a term without providing a definition cannot be 
regarded as satisfactory, however valuable in itself 
the discussion may be. If, therefore, an economist 
brings into prominence the many difficulties in the 
way of an unexceptionable definition, it should also 
be his aim to make it clear what formula affords 
in his opinion the best available solution of the 
difficulties. 



v.] DIFFICULTIES IN APPLYING DEFINITIONS. 171 

The truth is that in drawing hard and fast lines — 
as definitions compel us to do — there is necessarily 
something artificial; for such lines are not drawn by- 
nature. Here, as elsewhere in economic matters, a 
principle of continuity is in ojDeration, and different 
classes imperceptibly merge into one another. Hence 
arises the necessity of being content, in some cases, 
with definitions that are not absolutely unequivocal 
and determinate. Where this is so, the characteristics 
of the limiting cases that may arise will form a valuable 
subject of consideration, and attention should be called 
to them. But they may then be neglected, except 
where, in special connexions, they rise into exceptional 
importance. 



CHAPTER VI. 

ON THE METHOD OF SPECIFIC EXPERIENCE 
IN POLITICAL ECONOMY. 

§ 1 . Pi'eliminarij functions of observation in economic 
enquiries. — An endeavour will be made in the present 
chapter to shew that, except within a somewhat limited 
sphere, the method of specific experience cannot by 
itself afford a sure and adequate foundation for the 
attainment of general economic truths, and that political 
economy is accordingly not to be considered — as some 
maintain — a purely empirical or inductive science. 
At the same time, it may be well to say explicitly 
at the outset that herein one side only of the truth 
is presented. If pure induction is inadequate, pure 
deduction is equally inadequate. The mistake of 
setting up these methods in mutual opposition, as if 
the employment of either of them excluded the em- 
ployment of the other, is unfortunately very common. 
As a matter of fact, it is only by the unprejudiced 
combination of the two methods that any complete 
development of economic science is possible. 



CHAP. VI.] OBSERVATION OF A PRELIMINARY KIND. 178 

At an early stage of economic enquiry, observation 
has functions to perform, which, though very important, 
are somewhat liable to be overlooked. In the first 
place, it is from observation that even deductive 
economics obtains its ultimate premisses. From this 
point of view, an introspective survey of the operation 
of those motives by which men are mainly influenced 
in their economic activities is of fundamental import- 
ance ; and this introspective survey must be combined 
with observation of the conduct of other men in the 
economic sphere. Observation is also needed in order 
to determine how far and in what way economic 
motives may be compared and measured. The fact, 
learnt by observation, that as a rule they are measur- 
able, is one of the principal reasons why political 
economy is able to resolve itself to a considerable 
extent into the form of a deductive science. 

It is further necessary that there should be an in- 
vestigation of the principal physical and other circum- 
stances by which economic activities are conditioned. 
In particular, the legal structure of society in its general 
economic bearing must be examined. Of this kind of 
preliminary observation, and more generally of the part 
played by observation in connexion with the deductive 
method, a further consideration will follow in a later 
chapter. In the meantime, there is a certain distinction 
to which attention may be drawn. The observation that 



174 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

precedes deductive reasoning is in the main not obser- 
vation of complex economic facts, but of elementary 
economic forces and the conditions under which they 
operate. It is by the agency of these forces that 
complex economic facts are built up^. 

In all economic investigations, however, it is also 
requisite that there should be some preliminary obser- 
vation of the complex phenomena themselves, with a 
view to their description and provisional classification. 
The phenomena which really constitute the subject- 
matter of economic science are thus passed under 
review in their concrete manifestations ; the problems 
to be solved are indicated ; and means are afforded for 
guiding and controlling our subsequent reasonings. 

The department of political economy which deals 
with economic phenomena from the descriptive stand- 
point may be spoken of as descriptive economics, as 
distinguished from constructive economics which aims at 
establishing laws or uniformities. Descriptive economics 
has itself been further subdivided into a formal and a 
narrative branch-. The former of these analyses and 
classifies the conceptions, such as wealth, capital, value, 
money, &c., which are needed for understanding the 
nature of economic phenomena, and it involves the 

^ Compare Wagner, Grundlegung dcr polituehcii Oeionoviie, 1892, 
§ 92. 

- See Mr W. E. Johnson's article on the Method of Political 
Economy in Mr Palgi'ave's Dictionary of Political Economy. Mr 



VI.] DESCEIPTIVE ECONOMICS. 175 

logical processes of definition and division. The latter 
investigates historically and comparatively, and with 
the aid of statistics, the particular economic pheno- 
mena which are met with in different communities 
and at different epochs; it is essentially concrete and 
circumstantial. 

Within the province of descriptive and classificatory 
economics, there is unlimited scope for valuable economic 
work. In a broad sense, descriptive economics includes 
the whole of economic history and economic statistics. 
But at the same time, the knowledge of particular facts, 
which is thus afforded, does not in itself constitute the 
end and aim of economic science, the central problems 
of which are constructive and not merely descriptive. 
It would not be necessary to dwell at all upon this, 
were not the view sometimes put forward that political 

Johnson gives the following scheme of the chief departments of 
economic science from the methodological standpoint: 

Positive Economics 

r ^ n . 

Descriptive - Constructive 

I ■ ^ n 1 ^ -1 

Formal Narrative Inductive Deductive 

, L 



1 I 1 I I 

Definitions Divisions Chronological Comparative | Pure Mixed 

I — n 
Pure Mixed 

It will he observed that the divisions given under the head of 
constructive economics relate to the method of reasoning adopted, 
which may be predominantly inductive or predominantly deductive, 
whilst in each case a mixed method is recognised in which induction 
is modified by deduction, or deduction by induction. 



176 THE METHOD OF SPECIFIC EXPEFIENCE. [CPIAP. 

economy is nothing more than an empirical science in 
its descriptive or classificatory stage. It is held by 
some writers that under existing conditions it is im- 
possible for the economist to accomplish more than the 
provision of a nomenclature, and the description and 
classification of what is directly observed ; and it is said 
accordingly that economics must "be content to observe 
and classify and describe and name."^ 

Political economy does not, however, deserve the 
name of a science at all, if the economist is not com- 
petent to reason about the phenomena of wealth, and 
discover laws of causal connexion. Mere description 
cannot constitute a science ; and political economy has 
no purely classificatory stage, such as will enable it to 
be compared with sciences of the type of zoology and 
botany, which deal with material objects falling into 
a natural system of classification. The doctrine in 
question seems practically to overlook the fact that 
economics is of necessity a science of cause and effect. 
The economist cannot help endeavouring to trace 
effects to their causes, and to assign to causes their 
effects. But the detection of causal connexion needs 
the assistance of some apparatus of reasoning, induc- 
tive or deductive or a combination of these. Mere 

1 Compare Dr Cunningham's pamphlet on Political Economy 
treated as an Empirical Science. The somewhat similar doctrines 
held by the more extreme members of the German historical school 
will be discussed in greater detail subsequently. 



VI.] DESCRIPTIVE ECONOMICS. 177 

reflective observation cannot possibly give the requisite 
insights 

It is to be added that while some preliminary 
description and classification of concrete economic 
phenomena rightly precedes the treatment of economic 
theory, still such description and classification must 
be regarded as in the first instance only provisional. 
Relations of cause and effect are often implied in what 
appears to be simple description. Hence without some 
examination of underlying principles, the description of 
economic facts, to say nothing of their classification, is 
apt to be unconsciously deceptive, an element depend- 
ing upon the individual writer's personal bias being- 
imported into what professes to be the mere holding 
up of a mirror to nature. The more complete our 

1 It has been already mentioned that Wagner recognises three 
theoretical problems in political economy, namely, the description 
of economic phenomena, their arrangement under tyj^es, and the 
explanation of the causes upon which they depend (see p. 37 and 
note 1 on p. 38). He adds, however, that the three problems really 
constitute three stages of a single problem, and that they must not 
only be all of them as far as possible solved, but also in the order in 
which they are given. Political economy, he goes on to say, would 
be, if still a science, at least no independent science, but only a part of 
historical science and descriptive statistics, if — in accordance with 
certain tendencies of the historical school — it were to limit itself to 
the first of the three problems. The second and third really consti- 
tute the special and chief problems of political economy, for the 
solution of which the first was merely preparatory; and it is only 
when the second and third problems are reached that political 
economy becomes a really independent and theoretical science 
(Grundlegiing der politischen Oehonomie, 1892, § 58). 

K. X2 



178 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

knowledge of the laws by which economic phenomena 
are regulated, the more accurate will our description 
and classification of them become. 

Whatever importance then may be attached to 
purely descriptive economics, it is necessary to pass 
on from observation to processes of inference that will 
satisfy logical canons; and the first question to be 
considered is how^far specific observation of industrial 
phenomena can lead directly to the establishment of 
economic laws. By the method of specific experience 
is here meant the method that passes slowly from 
particulars to axiomata tnedia, and thence to the highest 
generalizations of the science, without ever reversing 
the order. 

Two forms of the purely inductive method may be 
distinguished. In the first place, some single set of 
economic facts may be examined under special con- 
ditions, with a view to the application of the logical 
method of difference. In the second place, an elaborate 
collection of some particular class of economic facts may 
be made with a view to generalization from a large 
number of instances. In the former case, recourse is 
had to experiment or to some substitute for experiment. 
In the latter case, the sources from which our material 
is gathered are history and statistics. 

§ 2. Limited scope for experiment in political 
economy. — Observation and experiment are sometimes 



VI.] OBSERVATION AND EXPERIMENT. 179 

contrasted with each other as if they were distinct 
methods of obtaining knowledge. But this is of course 
not the case. Experiment is nothing more than the 
process of deliberately producing phenomena for our- 
selves, so that we may be enabled to observe them 
under the most advantageous circumstances \ In 
experiment we have a control over the phenomena 
under investigation, and generally a far more precise 
knowledge of the conditions under which they occur, 
than is possible in cases where they are brought about 
independently of our own action. Where there is 
free scope for experiment, we can also multiply our 
instances under varying conditions, and thus isolate 
phenomena successively from those circumstances that 
might obscure their true character. It is accordingly 
to experiment that recourse is usually had for the 
application of the m^hod_^f difference, which is the 
only completely adequate method of reasoning from 
specific experience. 

The essence of the method of difference is the 
comparison of two instances, which resemble one 
another in all material respects, except that in one a 

' We sometimes hear of " unintentional experiments," such as 
a railway accident or a famine. Experiment, however, in the logical 
sense implies something that is brought about deliberately and of set 
purpose : it is not mei'ely any striking event from the investigation of 
which special insight may be gained. The conditions under which 
such phenomena as the above may serve as substitutes for logical 
experiment will be considered later on. 

12—2 



ISO THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

certain cause is present, while in the other it is 
absent. The effects of that cause are thus made 
manifest. 

The requirements of the method can best be 
satisfied if the cause, whose effects are under investi- 
gation, comes singly into operation in a state of things 
with which we are so well acquainted that no material 
change can pass unobserved. It is also generally 
speaking essential that there should not be a long 
interval between the occurrence of the cause and the 
production of the effect ; otherwise it is practically 
impossible to exclude the interference of extraneous 
and unknown causes. Under these conditions, the 
instances compared are the state of things before, and 
the state of things after, the given cause has come into 
operation; and this is the form of the method usually . 
adopted when recourse is had to experiment. 

We have a different form of the method, when one 
of the instances is the state of things brought about 
by the given cause operating in conjunction with other 
causes, while the second instance is the state of things 
brought about by causes similar to the latter operating 
alone. It is not essential here that the nature of the 
" other causes " should be completely known ; the sole 
requirement is that they should occur equally in both I 
instances. It is very difficult, however, to be sure that 
this requirement is really fulfilled ; and hence the 



VI.] EXPERIMENT. 181 

first way of applying the method is usually the more 
satisfactory \ 

It may now be asked how far effective experiment 
is possible in political economy, or how far without 
experiment the conditions requisite for the employ- 
ment of the method of difference are capable of being 
satisfied. 

It cannot be said that experiment is a resource 
from which we are absolutely debarred in economic 
enquiries. Experiment may assist in establishing the 
simpler laws of the production of Avealth — as, for in- 
stance, those relating to the circumstances upon which 
the efficiency of labour depends, and the means whereby 
such efficiency may be increased. Thus, by the aid of 
experiment the economist may directly investigate the 
effect of the specialization of skill upon the dexterity 
of the workman, and hence be the better able to 
estimate the economic consequences of the division of 
labour. The law of diminishing returns can also be 
tested by experiment. 

But these are problems that lie only on the thresh- 

1 Illustrations of both the above varieties of the method of 
difference will be found later on. There is a third variety, in which 
the given cause operates in conjunction with other causes, whose 
nature and individual effects are accurately known both in kind and 
amount. In this case, the effect of the given cause may be de- 
termined by subtracting from the total effect the sum of the effects 
of the other causes. This form of the method of difference is 
technically known as the method of residues. 



182 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

old of economics. Indeed, some of the laws thus 
determined by experiment may be regarded as the 
contributions of other sciences to economics, rather than 
as conclusions obtained by it. In regard to problems 
of distribution and exchange, and the economic in- 
i fluence exerted by social institutions and governmental 
policy, the possibility of effective experiment is far 
more questionable. The phenomena are for the most 
part not such as can be manipulated at will ; and even 
when some kind of experiment is possible, our power of 
controlling and varying the concomitant circumstances 
is very limited; nor can the experiment be freely 
repeated \ 

It is sometimes said that every new law is an 
experiment; and, in the popular sense in which the 
term experiment is used, this is true. In all legisla- 
tion, new phenomena are produced by human agency; 

^ Cairnes, after stating that the economist is precluded from the 
use of experiment in the ordinary sense, suggests as an inferior 
substitute what he speaks of as "experiment conducted mentally." 
Hypothetical conditions are first formulated ; then some new agency 
is supposed to come into oijeration under these conditions; and 
finally the effects of this new agency are deduced. In this way, 
Cairnes adds, "Eicardo employed, as far as the nature of his problem 
and the circumstances of the case permitted, that experimental 
method which those who would disparage his great achievements 
affect to extol, but the real nature of which, as their criticisms shew, 
they so little understand" (Logical Method, p. 81). The process 
referred to is a form of the deductive method, and is of the greatest 
utility. But to speakof it as in any sense "experimental" can hardly 
be considered a legitimate use of language. 



VI.] EXPERIMENT. 183 

the precise character of these phenomena either in 
kind or amount, it is generally impossible to foretell ; 
and, although a return to the exact status quo ante 
may be out of the question, some further modification 
by subsequent legislation is always possible. But it 
is not the case that the primary object of every new 
law is to afford means of studying the effects which 
a change of conditions or the introduction of a new 
agency is capable of producing ; nor is any effort made 
to arrange or modify the attendant circumstances so 
as to facilitate the attainment of this object. Legis- 
lation cannot, therefore, be generally speaking regarded 
as equivalent to experiment in physical science \ 

The statesman may, however, rightly be said to ex- 
periment when he adopts avowedly tentative measures, 
with the express object of gaining insight into their social 

1 Bacon distinguishes between experimenta lucifera and experi- 
menta fructifera. "Experiments, which are in themselves of no use, 
but avail only for the discovery of causes and axioms, we are wont 
to call light-hringing experiments, to distinguish them from fruit- 
hearing ones. They have in them a wonderful virtue and condition ; 
namely, that they never deceive or disappoint. For since they are 
employed not to effect any result, but to reveal the natural cause in 
something, however they fall out, they equally satisfy our purpose, 
inasmuch as they settle the question" {Novum Organon, Book i. 
Aphorism 99). In modern works on logic, the term experiment is 
usually limited to experimentmn luciferum ; in other words, we mean 
by an experiment in the logical sense, some course of action whose 
immediate object is increase of knowledge, rather than material 
advantage. It is only in special cases that experimenta fructifera are 
also to any marked extent lucifera. 



184 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

and economic effects. Such a course may be adopted in 
a modification of tariffs, the duties on a few articles only 
being in the first instance altered ; or in a reform of 
the Poor Laws, the change affecting in the first instance 
only one or two counties. Legislation of a permissive 
character may, again, be specially intended to resolve 
itself into local experimentation. Action of a novel 
kind may be taken by local authorities in certain parts 
of the country, and the results watched by those in other 
parts of the country. Thus the area of operation may 
gradually be extended, and perhaps with each extension 
fresh lessons may be learnt. It should be observed 
that in this case we are able to compare the condition 
of the locality where the experiment has been made, 
not only with the antecedent condition of the same 
locality, but also with the condition of other localities 
where there has been no such experiment. By bhe 
latter comparison we may be enabled to eliminate the 
effects of concurrent social and industrial changes that 
are affecting the country as a whole. There is here a 
combination of the two forms of the method of difference 
to which reference has been already made^ 

1 Tentative legislation is strongly advocated by Jevons in one of 
his essays on Methods of Social Reform (pY>. 253 ff.). He points out 
that by this means it is possible to make "direct experiments upon 
the living social organism," and to conduct social experimentation with 
a view to social progress. It may be observed that in the Middle Ages 
laws were frequently passed for a limited period of years. This 



VI.] • EXPERIMENT. 185 

It should be added that in special cases economic 
experiments may be made by private bodies of indi- 
viduals; as, for instance, those of Robert Owen and 
his followers in communism. Another interesting 
example of a somewhat different kind is afforded by 
the year's trial of the " forty-eight hours' week " made 
in 1893 at the Salford Iron- works of Messrs Mather 
and Piatt. 

Still, at the best, experiments, such as the above, 
are made under very different conditions from those 
that are conducted in the laboratory of the chemist or 
the physicist. It by no means follows that whenever 
experiment of some sort is possible, the requirements 
of the method of difference can be adequately fulfilled. 
So far, for instance, as experiments involve tentative 
legislation, it is at any rate not possible to make them 
at will ; and, therefore, the process of investigation for 
ordinary enquirers differs little from simple observation. 
Nor are the experiments actually made likely to be of 

remark applies, for example, to early legislation affording protection 
to native industries. Thus in 1455 the silk workers and spinners 
complained that their industry was being ruined by the Lombards 
and others, and a law was passed prohibiting for five years the im- 
portation of manufactured silk goods. In 1463— after an interval, 
during which the law was inoperative — a similar measure, but of a 
more general character, was passed; and again, after another in- 
terval, in 1482. There were several subsequent renewals, and it was 
not till the beginning of the following century that the prohibition was 
made perpetual. By experimental legislation of this kind, whatever 
its other drawbacks, fresh experience was continually gained. 



186 THE METPIOD OF SPECIFIC EXPERIENCE. [CHAP. 

the kind that the theoretical economist would naturally 
select. It is to be added that even statesmen cannot 
indefinitely multiply the instances under varying cir- 
cumstances ; and thus one of the special advantages of 
experiment is lost. 

It is further to be observed that in the economic 
world those effects, that are of the most consequence, 
are apt to be produced very gradually. There is, 
therefore, the greater opportunity for the independent 
occurrence of material changes over which we cannot 
possibly have control, and of whose occurrence we 
may even have no suspicion. It is, in other words, 

j specially difficult to isolate any single cause from 

j other causes whose effects may be mistaken for its 

\ own. 

\ Experiments that involve the voluntary action of 
individuals are also under a peculiar disadvantage, 
inasmuch as the persons who are made the subjects of 
the experiment are likely to be themselves interested 
in the result. Thus, in experiments intended to throw 
light upon the economic effects of community of goods, 
it is impossible to exclude the interference caused by 
the fact that the majority of the members of the self- 
constituted societies, seeking to realise socialistic ideas, 
are probably — at any rate at the outset — specially 
selected persons, by no means typical or representative 
of mankind in general. They are likely to be persons. 



VI.] EXPERIMENTS IN COMMUNISM. 187 

who are individually disinterested and unselfish, while 
they are at the same time peculiarly anxious that the 
results should be of a nature favourable to the scheme 
they have at heart. In some cases, the members of 
voluntary communistic societies have further been held 
together by special bonds of a religious nature. So 
far, then, as these considerations go, communistic 
experiments would appear to be unduly favourable 
to communism. It is true that such experiments as 
have actually been tried have more often met with 
failure than success. But in order to account, for this, 
advocates of communism may call attention to another 
source of weakness in the experiments, that tells in the 
opposite direction. For it may be maintained that 
because of the small scale on which alone it is possible 
to experiment, and the uncongenial environment, and 
the fact that exceptional and sustained sacrifice of 
a purely voluntary kind is required on the part of the 
strongest and ablest of those concerned, the principle 
under trial is not allowed a fair chance. It cannot 
be said that no useful lessons are to be learnt from 
experiments of the kind referred to ; but it seems 
clear that they cannot be regarded as by themselves 
providing conclusive evidence either one way or the 
other \ 

1 Some of the above observations apply to the interesting ex- 
periment, already referred to, which was made by Messrs Mather and 



188 THK METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

§ 3. TJie employment of the method of difference 
independently of deliberate ewperiment. — ^On the whole — 

Piatt in 1893 in order to test the working of an eight hours' day ; and 
a very brief account of that experiment (taken from the Economist for 
31 March 1894) may here be given. The firm, who employed about 
1200 men in the engineering and machinery trades, were anxious to 
reduce the hours of labour, and they took their workmen into counsel 
with them on the subject. As a result, it was arranged that from 
February 1893 to February 1894 the works should run 48 instead of 
53 hours per week, the rate of wages remaining unaltered. The 
details of the scheme were discussed with the officials of the Amalga- 
mated Society of Engineers, and the Society undertook that during 
the year in which the experiment was to be tried no demand for 
a reduction of hours should be made upon other employers. It was 
moreover pointed out to the workmen that if the new system was to be 
a success, they must themselves contribute their share towards making 
it so by greater punctuality and by increased energy and interest 
during the shorter hours. An earnest appeal was also made to the 
foremen in the various departments to exercise foresight and vigilance 
lliroughout the year in forwarding the work from process to process, 
in furnishing materials well in advance, and in providing such simple 
facilities and workshop conveniences, other than new tools, as might 
from time to time be suggested by the men, especially the piece-work 
men. A special feature in the experiment was that no overtime 
whatever was worked, except for breakdowns and rejriairs ; extra men 
being employed, on the double shift plan, to meet extra pressure of 
work. It was arranged with the men and with the trade-unions that 
should the experiment prove a failure, the firm should be allowed to 
modify the programme or revert to the old system. 

The results of the experiment were worked out very fully by 
Mr William Mather, the indirect, as well as the direct, advantages 
and disadvantages of the new system being carefully calculated 
and balanced one against another. It is unnecessary to go into 
details here ; it will suffice to say that the results were found to be 
very satisfactory from the point of view of the employers as well as 
from that of the workmen. The gross earnings of pieceworkers were 
somewhat reduced, but this reduction was slight in comparison with 
the reduction in their hours of labour ; and the very slight increase in 



VI.] EXPERIMENT. 189 

leaving on one side the more elementary phenomena of 

the production of wealth — the help to be derived from 

deliberate experiment in political economy is but slight. 

It will for the most part be found that the exceptional 

cases, in which the method of difference can with some 

success be employed in complex economic enquiries, 

are not the result of experiment at all, but are due 

the wages cost of production was counterbalanced by the saving in gas 
and electric lighting, and in wear and tear of machinery, &c. 

It cannot be doubted that the experiment was a valuable contri- 
bution to the determination of the economic effects of a shortening of 
the hours of labour. At the same time it is possible to exaggerate 
its cogency, even if it be assumed that, in making his calculations, 
Mr Mather was able to eliminate interferences due to external changes 
in the state of the trade in which the firm was engaged. 

As was pointed out by critics at the time, the conditions under 
which the reduction of hours of labour took place were in several 
respects exceptional in character, so that doubt may be felt as to 
whether the satisfactory results should not in large measure be 
credited to these collateral conditions rather than to the mere reduc- 
tion of working hours. Thus some part of the gain might not un- 
reasonably be attributed to the better organization enjoined upon the 
foremen in the various departments, and to the additional facilities 
afforded to the pieceworkers to enable them to increase their output. 
It was moreover natural that throughout the trial year all concerned 
should do their utmost to make the trial a success. The men would 
naturally strain every nerve at the beginning in order to secure 
a permanent future advantage ; and the employers would not be less 
anxious that the experiment which they had initiated should not 
result in failure. 

Under a general eight hours' system these special incentives to 
increased production would be wanting. Hence any generalization 
from a particular case of this kind must be made with caution ; and 
the experiment ought to be considered along with much other evidence 
bearing on the point at issue rather than as by itself affording a 
decisive solution of the question. 



190 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

either to the sudden but fortuitous introduction of 
influences, abnormal in their character or in the scale 
of their operation, or else to the rare chance of two 
communities existing side by side, in both of which all 
the agencies affecting their economic condition, save 
one, are similar in kind. 

An example, to which the former of the above 
descriptions will apply, is afforded by the sudden 
diminution in the supply of labour on an altogether 
abnormal scale caused by the Black Death in the 
fourteenth century. By a comparison of the conditions 
of the labour market before and after this plague, some 
of the effects of a scarcity of labour on wages are 
distinctly indicated even by the aid of the imperfect 
data that alone are now obtainable \ Again, in the 
issue of assignats at the time of the French Revolution, 
in the suspension of the Bank Charter Act during a 
period of crisis, in a sudden burst of activity such as 
manifested itself in the American railroad construction 
of 1881, we have further examples of agencies coming 
suddenly into operation and producing effects that 
seem unmistakeable. 

An example belonging to the second type is to 
be found in the first two chapters of the second 

1 An example of a somewhat similar character — the Irish potato- 
famine of the years 1845 to 1849— is adduced by Sir G. C. Lewis, On 
the Methods of Observation and ReasoniiKj in Politics, Chapter 6, § 8. 



VI.] EXAMPLES OF THE METHOD OF DIFFERENCE. 191 

book of Malthus's Essay on Popidation. Malthus 
cites Norway and Sweden as two countries closely 
resembling one another in their general economic 
conditions, except that Sweden had some advantage 
in a more favourable soil and climate. Nevertheless, 
the average mortality in Sweden in proportion to its 
population was considerably higher than in Norway, 
the lower classes of the people were in a less flourishing 
condition, and the increase of mortality in barren 
seasons was peculiarly striking. Malthus accordingly 
applies the method of difference in order to determine 
the cause of this diversity; and he finds it to consist 
in the superior force in Norway of preventive checks 
to the increase of population. Thus, till within a few 
years of the time when he wrote, every man in Norway 
was subject to ten years' military service ; and during 
this period he " could not marry without producing a 
certificate, signed by the minister of the parish, that 
he had substance enough to support a wife and 
family ; and even then it was further necessary for 
him to obtain the permission of the officer." The 
general sentiment of the country was also opposed 
to early marriages. Labour was little migratory, and 
the division of labour was not carried far ; every man 
could, therefore, judge of the openings that existed 
for his own employment and that of his children ; 
and thus the danger of a redundant population was 



192 THE METHOD OF SPECIFIC EXPERIENCK. [CHAP. 

more clearly brought home to each individual. In 
Sweden, on the other hand, the variety of employment 
was greater; and the danger of" redundancy, therefore, 
not so apparent. The average proportion of yearly 
marriages to the whole population was larger than 
in Norway, and this proportion increased at every 
temporary and occasional increase of food. At the 
same time, the continual cry of the government was 
for an increase' of subjects, and practical evidence of 
this desire was given in the establishment of lying-in 
and foundling hospitals. The contrast was, therefore, 
very marked ; and, taking it in connexion with the 
general similarity between the two countries in other 
respects, the conclusion drawn by Malthus seems 
difficult to gainsay \ 

Mill indicates in his Logic the conditions that he 
regards as alone adequate for the application of the 
method of difference in the protectionist controversy. 
" If two nations," he says, " can be found which are 
alike in all natural advantages and disadvantages; 
whose people resemble each other in every quality, 
physical and moral, spontaneous and acquired ; whose 
habits, usages, opinions, laws, and institutions, are the 
same in all respects, except that one of them has a 
more protective tariff, or in other respects interferes 
more with the freedom of industry ; if one of these 
1 Compare Bonar, Malthus and hh JVork, p. 132, 



VI.] CONDITIONS OF THE METHOD OP DIFFERENCE. 193 

nations is found to be rich, and the other poor, or one 
richer than the other, this will be an experimentum 
cruets: a real proof by experience, which of the two 
systems is most favourable to national riches."^ 

The implication is that these conditions are 
necessarily incapable of being satisfied. It has 
been maintained, however, that a comparison of the 
economic progress of Victoria and New South Wales 
during the period succeeding the year 1870 actually 
provides an instantia crucis of the kind asked for. 
Both colonies gained ground after 1870, but the 
progress of New South Wales is said to have put 
that of Victoria into the shade, whether we take, as 
our criterion population, or revenue, or exports and 
imports, or the value of rateable property. The 
method of difference has accordingly been applied to 
find the cause of this. The territories of the two 
colonies are contiguous; they closely resemble one 
another in natural advantages and disadvantages; 
their inhabitants belong to the same stock, and are 
similar in character and habits; they are governed 
on the same principles; their institutions have been 
for the most part the same. But in this respect 
there is one striking exception. In Victoria a policy 
of protection has been in the ascendant, in New 
South Wales a policy of free trade. Here then, it is 

1 Logic, vol. 2, p. 47'2. 
K. 13 



194 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

argued, is to be found the difference required to 
account for the diversity in the progress of the two 
colonies^. 

It cannot be denied that in such cases as the above 
some degree of cogency attaches to the emphjyment 
of the method of difference even in complex economic 
enquiries ; in other words, a connexion of cause and 
effect can be established by this method with a more 
or less high degree of probability. The cases of 
which this can be said are, however, exceptional ; and 
even in the most favourable instances, confirmation 
by some independent line of reasoning is indispensable. 
For, in consequence of the complexity of the surround- 
ing circumstances, and the length of time generally 
required for effects fully to manifest themselves, it is 
impossible that the conditions requisite for the valid 
employment of the method should be more than 
approximately fulfilled. Such conditions as are often 
satisfied in physical science are quite unattainable. 

If we are sometimes inclined to accept without 
question economic arguments based on the method of 
difference, it is to a large extent because the way 
has been prepared by previous reasoning tending 
towards the same conclusion. How far we rely on 

1 Compare Lord Farrer, Free Trade and Fair Trade, Chapter 29 ; 
and Sir G. Baden-Powell on the Res%dts of Protection in Young Com- 
munities in the Fortnightly Revieiv for March 1882. 



VI.] COMBINATION OF INDUCTION AND DEDUCTION. 195 

the previous reasoning, and how far on the a posteriori 
evidence pure and simple, it is often difficult to 
determine. The latter evidence may, as Cairnes points 
out, strongly arrest attention, because it deals with 
new and perhaps striking facts. But when the basis 
on which we really rest our conclusion is subjected to 
logical analysis, it will probably be found to combine 
induction and deduction, which mutually support and 
strengthen one another; and not to be — as at j&rst it 
seemed^purely inductive. 

It may be worth while to turn back to one or two 
of the instances given above, in order to examine their 
cogency in a little more detail. In the comparison 
drawn by Malthus between Norway and Sweden, it 
seems impossible to make quite sure that some vital 
difference between the two countries may not have 
been overlooked. Hence the argument has not the 
cogency that an ordinary argument based on the 
method of difference would have in physics or chemistry; 
nor does Malthus for a moment imagine that it has. 
He gives it as one item only in a mass of concurrent 
evidence; and as such its force is unquestionable. This 
exemplifies the true place of the method of difference 
in complex economic enquiries. Any given application 
of the method taken by itself has not the independent 
validity that belongs to the method under ideal con- 
ditions ; for such conditions cannot be fulfilled. But 

13—2 



196 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

it may usefully serve to strengthen or confirm evidence 
afforded by other methods. 

Similar remarks apply to the free trade argument 
based on the comparison between New South Wales 
and Victoria. It is clear that in this comparison 
account ought to be taken of the circumstances of the 
two colonies before as well as after 1870. The gold 
discoveries dating from 1851 caused Victoria to 
develope with extreme rapidity, her gold fields being 
about six times as productive as those of New South 
Wales. More recently, however, there has been a 
falling off in the Victorian production of gold from 
about ten millions annually to about three millions. 
May not the protectionist find here an obvious cause 
for the comparatively slow progress of Victoria after 
1870 ? Again in 1870, in consequence of the previous 
rapid development of Victoria, the two colonies started 
from a different level. While Victoria is not much 
more than a quarter of the size of New South Wales, 
her population was in 1870 very considerably the 
larger, and so was her external trade. But it is a 
well recognised fact that ceteris paribus the higher 
the stage a country has reached, the more difficult is 
it likely to be for her to maintain a high rate of 
progress. It may further be argued, rightly or wrongly, 
that by her policy of protection Victoria has laid the 
foundation of future greatness, whatever the imme- 



VI.] NEW SOUTH WALES AND VICTORIA. 197 

diate effects on her prosperity may have been. It is 
impossible, therefore, to base a perfectly conclusive 
argument upon a bare comparison of the circumstances 
of the two countries. 

The truth is that between any two countries there 
are sure to exist to an almost indejfinite extent differ- 
ences that may conceivably affect their economic con- 
dition. These differences may be small in themselves 
and not apparent on the surface, and yet in the 
aggregate their economic influence may be consider- 
able. " No two communities," says Sir Robert Giffen, 
" are sufficiently alike to be comparable in strict logic. 
The slightest differences in the race or moral con- 
dition of the two communities, who are to outward 
appearance much the same, might make a great 
deal of difference in their material progress. If the 
two are subjected to different economic regimes, how 
are we to tell whether the inferior progress of the 
one materially — even when we are sure about the 
inferiority — is due to the regime, and not to other 
differences in the character of the communities, which 
we cannot so well appreciate ? External economic 
circumstances are, besides, incessantly changing, and 
may affect two communities apparently of much the 
same character and position quite differently. If it 
were possible to institute many pairs of comparisons 
and exhibit a uniform result in all, it might be safe 



198 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

to infer that it was the regime which did make the 
difference, no other uniform cause of difference being 
assignable ; but this condition of course it is impossible 
to fulfil." ^ 

/^ So great is the danger of exaggerating the probative 
force of the method of difference in economic enquiries, 
that there is probably in popular economic reasoning 

i Essays in Finance, Second Series, p. 200. Mill argues on 
a j)riori grounds that it is impossible for two countries to agree in 
everything affecting their economic condition with the one exception 
of their policy as regards free trade or i^rotection. After the passage 
quoted on jDages 192, 8, he continues: "But the supposition that two 
such instances can be met with is manifestly absurd. Nor is such 
a concurrence even abstractedly possible. Two nations which agreed 
in everything except their commercial policy would agree also in that. 
Differences of legislation are not inherent and ultimate diversities; 
are not properties of Kinds. They are effects of pre-existing causes. 
If the two nations differ in this portion of their institutions, it is 
from some difference in their position, and thence in their apparent 
interests, or in some portion or other of their opinions, habits, and 
tendencies; which opens a view of further differences without any 
assignable limit, capable of operating on their industrial prosperity, 
as well as on every other feature of their condition, in more ways 
than can be enumerated or imagined. There is thus a demonstrated 
impossibility of obtaining, in the investigations of the social science, 
the conditions required for the most conclusive form of inquiry by 
specific experience." This h priori argument has some degree of 
validity; but it is pushed a little too far. The adoption of a free 
trade policy instead of a protectionist or lucc versa might conceivably 
be due to fortuitous circumstances. It might be due, for instance, 
to the ascendancy of an individual statesman or statesmen, whose 
influence was exerted on the particular side in question. It might, 
therefore, possibly be unconnected with any other differences of 
economic importance. At the same time, while such an occurrence 
as this is "abstractedly possible," it is without doubt improbable in 
the liighest degree. 



VI.] FALLACIOUS ARGUMENTS FROM CAUSE TO EFFECT. 199 

no more common fallacy than a false argument from 
cause to effect based on an illegitimate application of 
this methods 

Typical examples are to be found in the ordinary 
a posteriori arguments in favour either of protection 
or of free trade. The protectionist points to the 
prosperity of the United States, and the free trader 
to the prosperity of England. But economic prosperity 
or the reverse is of course the outcome of a variety 
of causes acting together, some of which tell in the 
same direction, while others more or less counteract 
one another. Granting that free trade tends towards 
prosperity, there may also be other powerful causes 
tending in the same direction ; and these may operate 
with greater force in the countries that happen to be 
protectionist than in those that happen to levy no 
protective duties. Hence it is quite compatible with 

1 It may be observed in passing that we commit the fallacy of post 
hoc ergo propter hoc not only when we assign an effect to an ante- 
cedent that is really unconnected with it, but also when we assign 
it exclusively to an antecedent that only partially accounts for it. 
For example, Professor Marshall enters a caution "against treating 
the new forces of competition as exclusively responsible for those 
sufferings of the English working classes at the end of the last 
century and the beginning of this, which were partly due to war, bad 
harvests, and last, but not least, a bad Poor Law. That law was 
itself antagonistic to free competition, which it set aside in favour 
of a crude form of socialism, that exercised a degrading influence 
on character" (Principles of Economics, vol. 1, 1st edition, p. 717 
note). 



200 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

the free trader's position that a given protectionist 
country should be more prosperous than a given free 
trade country. For it is not maintained that, how- 
ever much other circumstances may vary, prosperity 
is always proportional to freedom of commerce ; but 
simply that under given economic conditions the 
prosperity of a country is increased by free trade. 
On the other hand, if it be allowed that on the 
whole England has very greatly prospered since the 
repeal of the Corn Laws, the beneficial effects of 
free trade are not by this single fact alone rendered 
unquestionable ; for the conditions demanded by the 
method of difference fail altogether to be satisfied. 
Many other causes have been in operation during the 
last fifty years to which our prosperity might on 
similar grounds be rightly or wrongly attributed; for 
example, the progi'ess of invention, the vast improve- 
ment in means of communication and the diminished 
cost of transport, the spread of education, the Australian 
and Californian gold discoveries, the extension of the 
field for emigration, and the further opening up of new 
countries. It must, moreover, be remembered that, 
even before the repeal of the Corn Laws, England 
occupied a unique position in the commercial world. 
Friedrich List, applying the a -posteriori method, is 
led to attribute the commercial supremacy of Great 
Britain largely, if not mainly, to the restrictive policy 



VI.] THE METHOD OF DIFFERENCE. 201 

pursued by her up to the early part of the present 
century \ 

All things considered, it must be said that the 
method of difference has no very important part to 
play in economics ; and that even when it is employed 
under exceptionally favourable conditions, the argument 
is still not completely satisfactory, unless supported and 
strengthened by some independent line of reasoning. 
The function of the method of difference in political 
economy is to suggest or to confirm, rather than to afford 
complete and adequate proof. It should be added that 
the method needs to be employed with the greatest 
caution, even when it is used only for purposes of 
verification. So many counteracting causes may be in 
operation that the influence of a given cause, although 
undoubtedly exerted in a known direction, may be 
extremely difficult to detect in the complex facts, which 
alone are open to direct observation. More will be said 
upon this point in the following chapter. 

1 It would have seemed almost unnecessary to call attention to 
the above considerations were it not that the a posteriori argument in 
favour of free trade has recently been cited as a typical example of 
the value of the inductive method in economic enquiry. The 
inductive method, says Professor R. Mayo-Smith, is comparative, — "it 
compares economic institutions performing the same function among 
different nations of the same degree of civilisation, in order to 
discover which is the best" {Science Economic Discussion, p. 107) ; 
and he afterwards adds, as a special illustration of a general conclusion 
gained by induction, that we can reason "from the prosperity of 
England to the principle of free trade, at least for industrially 
developed nations" (ih. p. 114). 



202 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

§ 4. The method of inductive generalization from 
a multiplication of instances. — It has been shewn in 
the preceding section that the economist cannot to 
any considerable extent rely upon inferences based 
on the examination and comparison of single pairs 
of instances. It remains to be ccmsidered how far he 
can substitute quantity for quality, and can generalize 
from the direct observation of a number of cases 
in which the same cause is in operation under 
j varying conditions. Generalizations, thus based upon 
i an accumulation of instances, will fall for the most 
part under Mill's method of agreement, or his method 
of concomitant variations, and will be in the strictest 
sense empirical. 

The essence of the method of agreement consists 
in finding two phenomena constantly conjoined, while 
the remaining circumstances by which they are 
accompanied are none of them present in all the 
instances. Where this condition is fulfilled, it is 
inferred that there must be some causal connexion 
between the two phenomena in question. 

The peculiarity of the method of concomitant 
variations is that it requires quantitative data. 
Causal connexion is inferred to exist between two 
phenomena, because variations in the one correspond 
in some manner with variations in the other. 

In the endeavour to employ the above methods, 
the special sources from which material may be 



VI.] HISTORY AND STATISTICS. 203 

gathered are the history of the past and the sys- 
tematic observation of the present. The account of 
existing economic phenomena need not necessarily 
take a statistical or quantitative form. But since 
economics is essentially concerned with quantities, 
there is a tendency for contemporary economic records 
to become more and more statistical in tone. The 
same would be the case with the history of past times, if 
statistical data relating to the past could be multiplied 
at will. The further we go back, however, the fewer 
and the more untrustworthy are the figures at our 
disposal. 

The functions of history and statistics in economic 
enquiries are very important and very various. For the 
present, however, their distinguishing characteristics 
will not be dwelt upon; and they will be considered 
in respect of one of their functions only, namely, as 
constituting — along with the observation of everyday 
economic facts — the basis of inductive generalization 
from a multiplication of instances \ 

^ It is to be observed that some writers who insist upon the 
importance of the purely inductive method in economics use the term 
inductive in a rather wider sense than is usual in works on logic. 
"Finally, we may ask," says Professor E. Mayo-Smith, "what can 
the inductive method do when it faces some great economic problem 
which affects the whole community and civilisation itself? Such 
a problem is the labour problem. What is the condition of the labour- 
ing class? Has that condition deteriorated or improved? The 
inductive method has not shrunk from attempting to find an answer 
to even such questions as these. Thorold Eogers has laboriously 



204 THE METHOD OF SPECIFIC EXPERIENCE [CHAP. 

The first and most obvious point to notice is that 
the importance of the place to be assigned to such 
generalization in economics varies according to the 
nature of the problems under discussion. As a rule, it 
is less and less to be trusted, as we work up from the 
more simple to the more complex phenomena with 
which the science is concerned. This is in accordance 
with the ordinary logical canon, that the greater the 
number of causes in operation, and the more compli- 

ti-aeed the condition of tlie English labourer during the last six 
centuries, for the purpose of answering this question historically. 
Giffen has attempted, by statistics, to shew that the condition of the 
labouring class has materially improved during the last fifty years " 
(Science Economic Discussion, p. 111). What writers on logic, 
however, usually mean by induction and the inductive method is 
a process of reasoning, whereby on the sti'ength of particular instances 
a general law is established. In the above examples there is no 
establishment of any general law at all, and the enquiries are 
obviously of a kind that must proceed by a study of concrete facts. 
Not even the most extreme of anti-inductive economists has ever 
maintained that we can a liHori, or by any other method than that 
of specific experience, determine the condition of the labouring classes 
at any given time, or compare their condition at different times. 
It should then be clearly understood that in expressing doubts as to 
the efficacy of pure induction in political economy, we ai'e referring 
to the establishment of general laws on purely empirical data ; we do 
not mean to deny —it would indeed be absurd to deny— the essential 
and paramount importance of direct appeals to experience in en- 
quiries which are not concerned with the ascertainment of general 
laws at all, but merely with the investigation of economic phenomena 
at a particular time or place, or with their comparison at different 
times or places. In other words, we make no attempt to establish de- 
scriptive economics on any other basis than that of direct observation. 
The only question at issue is the place of induction in constructive 
economics. 



%l 



VI.] IN RELATION TO THE PRODUCTION OF WEALTH. 205 

cated the mode of their interaction, the less possible 
it becomes to fulfil the conditions required for valid 
inductive reasoning. 

It is in regard to the circumstances affecting the 
production of wealth that the relative importance of 
direct generalization from specific experience is the 
greatest. It has, indeed, been already pointed out 
that, in this department of the science, all economists 
agree in adopting as their principal resource an 
inductive method. No doubt, even within this sphere, 
they seek deductively to connect their conclusions 
with general principles of human nature. In other 
words, deduction and induction, here as elsewhere, 
supplement one another. Still, the inductive element 
is more prominent than the deductive. This is the 
case, for instance, in the investigation of the circum- 
stances upon which the degree of productiveness of 
productive agents depends, and in the comparison of 
production on a large and on a small scale. 

Again, in investigating the laws of the increase 
of capital, while the deductive argument from a 
psychological analysis of motives is important, the 
effects of external circumstances upon the operation 
of such motives can be ascertained only by fresh 
observation and direct generalization. It is experience 
that teaches what states of society most encourage 
saving, though no doubt the facts that experience 



206 THE METHOD OF SPECIFIC EXPERIENCE, [CHAP. 

brings to light can afterwards be psychologically 
accounted for. 

Similar remarks apply to theories of population. 
In the suggestion and development of such theories, 
the history of population, and statistical records of 
the manner in which the rate of increase of human 
beings has in fact varied with varying conditions, are 
of the first importance. This is exemplified in the 
second and later editions of Malthus's Essay 07i 
Population. Malthus pursues an inductive method of 
enquiry. His reasoning is directly based on historical 
and statistical data. He collects and compares recorded 
facts which throw light on the forces controlling the 
growth of population in a number of different countries, 
civilised and uncivilised, in past times and in modern 
Europe. 

As further examples of a valid treatment of 
economic problems, in which induction is placed in 
the foreground, reference may again be made to 
Cairnes's analysis of the economic characteristics of 
slave labour, and to Mill's discussion of peasant 
proprietorship in its economic aspects. It is worth 
specially pointing out that Mill's argument is based 
on the method of agreement, not on the method of 
difference. He is not able, satisfactorily or on any 
considerable scale, to compare different systems of land 
tenure under conditions identical in all other material 



VI.] EMPIRICAL GENERALIZATIONS. 207 

respects — identical, that is to say, in climate, fertility 
of soil, national character, methods of cultivation, and 
so forth. 

Some additional illustrations of the appropriate use 
of the empirical method in political economy will be 
found in the chapters that follow on economic history 
and statistics. To give here one more example of a 
typical character, it may be pointed out that in regard 
to the possibilities of co-operative production in its 
various forms we are in a marked degree dependent 
upon direct generalization from experience. 

When recourse is had to the empirical method it 
must always be remembered that the mere number of 
the instances is not so important,^ as that they should 
be diverse in character, and collected over a wide and 
varied range. The object is to eliminate the effects 
of adventitious circumstances ; and it is, therefore, 
important that the instances, upon which the argument 
is based, should have as little as possible in common, 
except those circumstances which constitute the special 
subject of investigation. A dozen well-selected instances 
fulfilling this condition are worth more than a hundred 
all of a similar character. 

It should be added that, taking empirical gene- 
ralizations at their best, great caution is necessary in 
extending them beyond the limits of actual experience. 
For, however wide and varied the range of economic 



208 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

conditions that has been examined, there may still 
be other conditions, in relation to which the inferred 
law needs considerable modification. Jevons truly 
remarks, — " However useful may be empirical know- 
ledge, it is yet of slight importance compared with 
the well-connected and perfectly explained body of 
knowledge, which constitutes an advanced and de- 
ductive science. It is, in fact, in proportion as a 
science becomes deductive, and enables us to grasp 
more and more apparently unconnected facts under 
the same law, that it becomes perfect. He who 
knows why a thing happens, will also know exactly 
in what cases it will happen, and what difference 
in the circumstances will prevent the event from 
happening. Though observation and induction must 
ever be the ground of all certain knowledge of nature, 
their unaided employment could never have led to 
the results of modern science." 

It follows that even when we rely primarily on 
induction, it is of great importance that our con- 
clusions should be confirmed and interpreted by 
deductive reasoning. Hence, in saying that in certain 
departments of economic enquiry induction is funda- 
mentally important, it is not meant that the need 
of deduction from more general principles is super- 
seded ; but merely that the induction paay usefully 
precede the deduction. 



VI.] LIMITATIONS OF THE EMPIRICAL METHOD. 209 

§ 5. Limitations of the empirical method. — There 
remain to be briefly considered those very important 
departments of economic enquiry, in which direct 
generalization from complex economic facts, without 
a prior appeal to underlying principles, is generally 
speaking in a high degree untrustworthy, and in 
which, if we depend upon inductive reasoning alone, 
our conclusions are more likely than not to be errone- 
ous. In this category are included the central problems 
of the exchange and distribution of wealth. It is of 
these problems th-at Cairnes is thinking when he 
speaks of the " utter inadequacy " of the inductive 
method in political economy. Bagehot is also referring 
to them, when he remarks : " The facts of commerce, 
especially of the great commerce, are very complex. 
Some of the most important are not on the surface; 
some of those most likely to confuse are on the 
surface. If you attempt to solve such problems 
without some apparatus of method, you are as sure 
to fail as if you try to take a modern military fortress 
— a Metz or a Belfort — by common assault : you must 
have guns to attack the one, and method to attack 
the other." By this reference to an " apparatus of 
method," Bagehot means that we are to proceed, not 
by the unaided analysis of complex economic facts, 
but by a synthesis, based on a previous examination 
of the nature and action of the elementary forces, 
K. 14 



210 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

through whose operation the complex facts are pro- 
duced. The need of an d 'posteriori investigation of 

. the concrete phenomena themselves, at a certain stage 

I of the reasoning, remains ; but no trust is to be put in 

'' an d posteriori method pure and simple. 

The argument, on which the above view is based, 

turns on the enormous complexity of the phenomena of 

the distribution and exchange of wealth. In the technical 

. J language of logic, the method of direct generalization 

is inapplicable, because of plurality of causes and 

' intermixture of effects. There is plurality of causes, 
i.e., the same phenomenon may on different occasions 
be traced to wholly different agencies; and there is 
intermixture of effects, i.e., the same cause is continually 
operating in conjunction with other causes, whose effects 
coalesce and combine with its own. In consequence 
of the latter circumstance, the effect proper to a given 
cause is, in one place, counteracted by some other 
influence operating simultaneously; in another place, 
it is intensified ; in another, it is modified and led 
to change its character. Mill shews clearly in the 
third book of his Logic (without any special reference 
to political economy) that where effects result from 
the union of many causes, the method of simple 
observation is in general inappropriate. The difficulty 
is increased by the length of time that is in the 
majority of cases required if the full effects of economic 



VI.] NEED OF DEDUCTIVE REASONING, 211 

causes are to be allowed to manifest themselves. In 
these cases, even if the purely a posteriori method 
enables us to detect the imn^ediate but transient 
effects of given economic changes, the ultimate and 
more permanent effects are likely to elude our grasp 
unless we are assisted by some "apparatus of method." 
Many of the problems of political economy are further 
complicated by the relation of mutuality that so often 
exists between the phenomena with which the science 
is concerned. Instead of one phenomenon determining 
a second, and the second determining a third, without 
any influence being in either case exerted in the 
opposite direction, the three phenomena may mutually 
determine one another. This is the case, for example, 
with supply, demand, exchange-value, and with other 
economic phenomena that are of equally fundamental 
importance. To deal with relations of this kind by 
the method of direct generalization is out of the 
question. We must, as Professor Marshall puts it, 
"work with the aid of a special organon,"^ 

For these reasons, it is impossible to frame any 
general theories of value, interest, wages, rent, &c, by 
purely a posteriori methods of reasoning. Recourse 
must needs be had to a method, in which deduction 
from elementary principles of human nature occupies 
a position of central, though not exclusive, importance. 

1 Present Position of Economics, p. 31. 

14—2 



212 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

Upon this point there is practical unanimity amongst 
economists, with the exception of the extreme wing of 
the historical school ; and they do not so much affirm 
that general theories can be obtained by the method 
of specific experience, as that it is useless attempting 
to obtain general theories at all. They turn aside, 
therefore, upon the track of a quite different class 
of problems. 

Leaving general theories, a typical instance may 
be added of an economic problem of a more special 
character, towards whose solution the purely a "posteriori 
method avails little or nothing. Suppose that it is 
desired to determine the relation, if any, between the 
general commodity-purchasing power of money and the 
price of securities yielding a fixed rate of interest. 
Can the method of concomitant variations suffice for 
a solution ? Statistics are available in abundance. The 
average price of Consols — which may be taken as 
representative of securities yielding a fixed rate of 
interest — is known for every year in the century ; 
and numerous tables have been compiled, shewing 
how, during a number of years, the average aggregate 
price of certain selected wholesale commodities has 
varied. In the construction of these tables certain 
difficulties present themselves, but however perfect they 
might be made, we could never, by simply comparing 
them with the price of Consols or any other kind of 



VI.] NEED OF DEDUCTIVE REASONING. 213 

security, obtain even approximately a solution of the 
given problem. For whatever may be the effect of the 
general purchasing power of money on the price of 
securities, it is at any rate likely to be insignificant by 
the side of other influences, such as the condition of 
the money market or the political outlook. It is true 
that the investigation, if it is to be complete, requires 
knowledge of the general characteristics of periods of 
rising and falling prices, such as can be gained only by 
experience. But it also of necessity involves deductive 
reasoning of some degree of complexity. 

In some cases it is possible approximately to satisfy 
the conditions of valid induction, and yet the conclusion 
so obtained cannot be regarded as more than suggestive 
and provisional, until deductive explanation and 
verification are forthcoming. Theories of periodic 
movements in the money market may be cited as an 
instance in point. 

It is remarkable that some writers on economic 
method should imply that while the deductive method 
might be applicable to a simple and stationary condition 
of industry, it becomes valueless in face of the in- 
creasing complexity of the modern economic world; 
and that under such conditions, at any rate, it must 
give way to the method of specific experienced We 

1 Compare Cliffe Leslie's essay on The Knoion and the Unknown in 
the Economic World. 



214 THE METHOD OF SPECIFIC EXPERIENCE. [CHAP. 

have already indicated reasons why the reverse is 
nearer the truth. It is needless to say that as the 
forces in operation become more numerous and their 
modes of interaction more intricate, and as changes in 
the general conditions of industry succeed one another 
more rapidly, the problems of economics become more 
difficult whatever method may be employed for their 
solution. The deductive method needs to be applied 
with the greater caution, and the apparatus of facts 
with which it has to be supplemented increases in 
importance. But on the other hand, facts by them- 
selves leave us the more helpless, and mere empiricism 
is the more misleading. Compare, for example, the 
investigation of the connexion between changes in 
gold supply and prices, or between changes in gold 
supply and the rate of discount, under simple and 
comparatively stationary industrial conditions, with the 
same investigation under complex industrial conditions, 
where credit and banking are fully developed, and 
where prices, and the condition of the loan market, 
are liable to alterations from an indefinite number of 
causes. If a mere d posterior'i examination of statistics, 
without any appeal to deductive argument, might in 
the former case be of some value, it would certainly in 
the latter case be almost worse than useless ^ 

^ Compare Sir Robert Giffen's admirable investigations on the 
above-mentioned subjects in the Second Series of his Essays in 



VI.] WEAKNESS OF PURE INDUCTION. 215 

There is a special reason why no attempt should be 
made to ignore or disguise the weakness of pure induc- 
tion in complex economic enquiries. The prevalence 
of a low type of inductive reasoning in the treatment 
of economic questions is one of the most fertile sources 
of economic fallacy; and, however legitimate the em- 
ployment of the inductive method may be under 
certain conditions, there can be no doubt that this 
method is liable to serious abuse. 

Finance. In these essays the necessity of having recourse to a 
deductive method of investigation is clearly shewn, whilst it is at the 
same time pointed out that the deductive argument must not ignore 
the actual working of modern commerce and modern banking. The 
use of the deductive method has been so constantly misrepresented, 
that it is well to lose no opportunity of repeating that to fall back 
upon a deductive line of reasoning by no means involves our going 
on our way regardless of actual facts. 



CHAPTER VII. 

ON THE DEDUCTIVE METHOD IN POLITICAL 
ECONOMY. 

§ 1. Nature of the deductive method. — In so far as 
the method of specific experience fails to afford reliable 
knowledge of economic laws, recourse must be had to 
a method, whose essence consists in the preliminary 
determination of the principal forces in operation, and 
the deduction of their consequences under various 
conditions. For an d posteriori argument depending 
entirely upon the examination of concrete facts in all 
the complexity of their actual presentation, is substi- 
tuted an a 'priori argument depending upon knowledge 
of the general characteristics displayed by men in their 
economic dealings one with another. " The problem of 
the deductive method," says Mill, " is to find the law 
of an effect from the laws of the different tendencies 
of which it is the joint result." The method in its 
complete form consists of three steps. It is necessary, 
first, to determine what are the principal forces in 
operation, and the laws in accordance with which they 



CHAP. VII.] THE DEDUCTIVE METHOD. 217 

operate. Next comes the purely deductive stage, in 
which are inferred the consequences that will ensue 
from the operation of these forces under given con- 
ditions. Lastly, by a comparison of what has been 
inferred with what can be directly observed to occur, 
an opportunity is afforded for testing the correctness 
and practical adequacy of the two preceding steps, and 
for the suggestion of necessary qualifications. It will 
be observed that only one of these three steps — namely, 
the middle one — is strictly speaking deductive. The 
so-called deductive method in its complete form is 
thus seen to be not an exclusively deductive method. 
It may more accurately be described as a method 
which, whilst predominantly deductive, is still aided 
and controlled by induction. This point will be further 
brought out in what follows, but it seems desirable to 
call attention to it at the outset. 

§ 2. The application of the term " hypothetical " to 
economic science. — Political economy, in having recourse 
to the deductive method, is usually described as essen- 
tially hypothetical in character. This description of 
the science needs, however, to be carefully explained 
and guarded, as there is some danger of confusion of 
thought in regard to the implications contained in it. 

All laws of causation may be said to be hypothetical, 
in so far as they merely assert that given causes will 
in the absence of counteracting causes produce certain 



J 



218 THE DEDUCTIVE METHOD. [CHAP. 

effects. As a matter of fact, in the instances that 
actually occur of the operation of a given cause, 
counteracting causes sometimes will and sometimes 
will not be present ; and, therefore, laws of causation 
are to be regarded as statements of tendencies only. It 
follows that all sciences of causation, and pre-eminently 
sciences employing the deductive method — including 
political economy and astronomy — contain a hypotheti- 
cal element. 

The above may be expressed somewhat differently 
by saying that the use of the deductive method in 
economics involves, at a certain stage, a process of 
abstraction, necessitating a frequent recurrence of the 
qualification ceteris paribus. The abstraction is carried 
furthest in reasonings where the motive of self-interest 
is supposed to operate unchecked in a state of economic 
freedom ; that is, in reasonings which involve the con- 
ception of the "economic man." But in all cases where 
the deductive method is used, it is present more or less. 
For in the deductive investigation of the economic 
consequences of any particular circumstance or any 
particular change, the absence of interfering agencies 
and of concurrent but independent changes is of neces- 
sity assumed. So far as other changes themselves 
result from the one change or the one circumstance 
specially under consideration, account must of course 
be taken of them; but the distinguishing characteristic 



VII.] LAWS OF CAUSATION. 219 

of the deductive method consists in seeking, in the first 
instance, to effect a mental isolation from the operation 
of all modifying forces that are not in some way con- 
nected causally with the particular subject of enquiry. 
The distinction between dependent and independent 
changes, here indicated, is of fundamental importance, 
and is in itself simple enough. At the same time, a 
difficulty is often found in keeping it clearly in view 
throughout the course of a complicated argument ; the 
faculty of succeeding in this is essential to sound 
economic reasoning, and needs special cultivation. 

It does not, however, follow that because a law 
is hypothetical in the above sense, it is therefore 
unreal or out of relation to the actual course of 
events. Although laws of causation may from a 
certain point of view be regarded as hypothetical, 
they are from another point of view categorical. 
For they affirm categorically the mode in which 
given causes operate. Moreover, even though a cause 
may be in a manner counteracted in consequence of 
the operation of more powerful causes acting in the 
opposite direction, it will still continue to exert its 
own characteristic influence, and will modify the 
ultimate result accordingly. No one supposes that 
the law of gravitation ceases to operate when a 
balloon rises in the air or water rises in a pump ; and 
this may serve as a simple illustration of what is of 



220 THE DEDUCTIVE METHOD. [CHAP. 

constant recurrence in regard to economic phenomena. 
An intensification, for instance, in the demand for 
a commodity may take place concurrently with an 
increase in supply; and hence the absolute effect of the 
change in demand may not be apparent in any actual 
change of price. It may even be that the price falls, 
whereas the change in demand operating alone would 
have caused it to rise. Were it not for the latter 
change, however, the price would, in the supposed cir- 
cumstances, have fallen still more. It remains true, 
absolutely and without qualification, that every change 
in demand tends to cause price to be different from 
what it would otherwise have been. 

Take, again, the theory that an increase (or dimi- 
nution) in the quantity of money in circulation tends 
ceteris paribus to be followed by a general rise (or fall) 
in pjices. This is, in a sense, a hypothetical law: it 
does not enable us to say that whenever there is an 
actual increase in the quantity of money in circulation 
there will actually be a rise in prices ; nor does it 
even enable us to say that if we find an increase 
in the amount of money in circulation taking place 
concurrently with a general rise in prices, the latter 
phenomenon must of necessity be wholly due to the 
former. For the cause in question is not the only one 
capable of affecting general prices. Its effects may, 
therefore, be counteracted by the concurrent operation 



VII.] " HYPOTHETICAL " CHARACTER OF ECONOMICS. 221 

o f mo re powerful causes acting in the opposite direction, 
or exaggerated by the concurrent operation of causes 
acting in the same direction. But while this is true, 
it is also true that wherever the cause in question is 
present, it does exert its due influence in accordance 
with the law laid down, and plays its part in helping 
to determine (positively or negatively) the actual effect 
produced. The given law, therefore, notwithstanding 
the hypothetical element that it contains, still has 
reference to the actual course of events ; it is an 
assertion respecting the actual relations of economic 
phenomena one to another. 

But the question may be raised whether deductive 
political economy is not hypothetical in a more funda- 
mental sense than has yet been indicated. It is clear 
that whenever conclusions are reached by deductive 
reasoning, their applicability to actual phenomena 
must remain hypothetical, until it has been determined 
how far the premisses which form the basis of the 
reasoning are realised in fact. May it not accord- 
ingly be said that some at least of the conclusions 
of deductive political economy are hypothetical in the 
sense that they require, not merely the absence of 
counteracting causes, but the realisation of certain 
positive conditions, which are not as a matter of fact 
always realised ? If this question is answered in the 
affirmative, it must not be understood to carry with it 



222 THE DEDUCTIVE METHOD, [CHAP. 

the implication that political economy employs arbitrary 
or fictitious premisses, or premisses whose relation to 
the actual phenomena of economic life is doubtful. 
This, however, appears to be what is meant by those 
who speak of the deductive method disparagingly, on 
the ground that it yields only hypothetical conclusions 
— conclusions which are affirmed to be useless for all 
practical purposes, however much their hypothetical 
validity may be beyond question. 

It is certain that in their use of the deductive 
method, economists do very frequently work from 
positive assumptions not universally realised. Indeed 
their premisses need to be varied in order to meet 
different . cases ; and this being so, it is clear that the 
applicability of their conclusions must depend upon 
circumstances. For instance, in dealing with problems 
that relate to rent, certain conditions of land tenure 
are assumed; and in treating monetary questions, 
certain regulations as to coinage, legal tender, instru- 
ments of credit, and so on, are supposed to be in force. 
Again, in working out theories of wages, it is a not 
unusual assumption that each grade of labour, or even 
the working class as a whole, has its own definite 
standard of comfort. Even those assumptions that 
may be summed up under the general head of absence 
of disturbing causes have a positive side. For the 
relevancy of the argument, so far as the explanation 



VII.] " HYPOTHETICAL " CHARACTER OF ECONOMICS, 223 

of actual phenomena is concerned, requires that, as a 
matter of fact, the causes, whose influence is neglected, 
shall be strictly "disturbing" causes, and shall not exert 
an influence so powerful as to reduce that of other 
agencies to insignificance. 

It must, however, always be borne in mind that 
the deductive method does not consist of the deductive ^ 
step alone. This appears to be forgotten by those 
who speak scornfully of the hypothetical character of 
deductive political economy. Mere deductive reasoning 
may indeed be symbolized by a hypothetical statement 
of the form. If P and Q are true, R is true. But 
the deductive method is not concerned merely with 
establishing the connexion between the truth of P and 
Q and the truth of P. In its complete form, it includes 
a preliminary investigation of the forces actually in 
operation, and the various conditions under which 
they operate ; and it also tests the applicability of its 
results to actual phenomena by appeals to the concrete 
realities that are open to direct observation. There is 
sometimes a convenience in taking the deductive stage 
of economic work more or less by itself; and in the 
pure theory of economics special prominence is given to 
it. But still the premisses are not chosen arbitrarily. 
For while the pure theory assumes the operation of 
forces under artificially simplified conditions, it still 
claims that the forces whose effects it investigates are 



224 THE DEDUCTIVE METHOD. [CHAP. 

verae causae in the sense that they do operate, and 
indeed operate in a predominating way, in the actual 
economic worlds 

A brief reference may here be made to laws of 
normal value, normal wages, &c. In the process of 
arriving at these laws, account is professedly taken only 
of the comparatively universal and permanent forces 
in operation, leaving on one side the varying influence 
exerted by the local and temporary causes that may 
happen also to act at any given moment. The laws are, 
therefore, arrived at by a very deliberate process of abs- 
traction, and they may appear to have an exceptionally 
hypothetical character. If, howeve^', the forces whose 
influence is calculated can be shewn to be really the 
predominant and more permanent ones operating in 
any given economic society, then it may be a legitimate 
postulate that the modifying forces act in different 
directions on different occasions, so that in the long 
run they tend to balance and neutralise one another. 
In these circumstances, although the conclusions of 
the deductive reasoning may fail to correspond with 
the observed facts in any individual instance, they will 
nevertheless be realised, if instances are taken in the 
mass and if the general conditions of economic life 

^ It is this point that Senior is anxious to insist upon, when, 
although holding that political economy "depends more on reasoning 
than on observation," he yet refuses to speak of it as a hypothetical 
science. 



VII.] " HYPOTHETICAL " CHARACTER OF ECONOMICS. 225 

remain unchanged for a sufficiently long period of 
time\ Laws of normal value &c. -are, therefore, not 
necessarily hypothetical in any sense that implies 
unreality. They are nearly always not merely of greater 
scientific importance, but also of greater practical im- 
portance, than the ever-varying phenomena observable 
in individual instances. It is indeed essential that the 
operation of local and transient influences should not 
be ultimately overlooked or disregarded. But until J 
knowledge has been gained of general and permanent 
tendencies, that which is local or transient will in all 
probability be itself misinterpreted. 

The conclusions reached in this section may be 
briefly summed up by saying that deductive political 
economy is rightly described as hypothetical, if by this 
nothing more is meant than that, in the first place, its 
laws are statements of tendencies only, and are there- 

1 It has to be recognised that the predominant and more perma- 
nent forces in operation are themselves hable to variation over long- 
periods, and this undoubtedly, as Professor Marshall points out 
{Principles of Economics, vol. i. 1895, p. 426), increases the difficulties 
that are met with in applying economic doctrines to practical 
problems. The question at issue may be made more clear if we 
explicitly distinguish two points that are involved in the determina- 
tion of laws of normal value, normal wages, &c. In the first place, 
we abstract from the operation of local and transient causes ; in the 
second place, we assume tliat the general conditions of economic life 
are stationary, so that the predominant forces in operation are 
themselves constant. It is only within the limits up to which this 
second assumption is, as a matter of fact, realised that normal value 
can be identified with average value, normal wages with average 
wages, &c. 

K. 15 



226 THE DEDUCTIVE METHOD. [CHAP. 

fore usually subject to the qualifying condition that 
other things are equal ; and that, in the second place, 
many of its conclusions depend upon the realisation 
of certain positive conditions, which are not as a matter 
of fact always realised. Given the conditions, however, 
the laws may be stated categorically. The conditions 
are, moreover, not arbitrarily assumed, but are chosen 
so as to correspond broadly with the actual facts in the 
different forms in which economic phenomena manifest 
themselves. In saying, therefore, that political economy, 
in so far as it has recourse to the deductive method, 
is a hypothetical science, it is necessary to guard 
against the idea that this implies unreality or want 
of correspondence with the actual order of economic 
phenomenal 

^ Much of what Cairnes says in his Logical Method of Political 
Economy about the hypothetical character of the science is perfectly 
sound, and expressed with his usual lucidity and effectiveness. But 
a few of his statements — as, for instance, when he remarks that an eco- 
nomic law is not an assertion respecting the actual order of economic 
phenomena (p. 99), and again that an economic law can be established 
or refuted only by an appeal to some mental or physical principle 
(p. 107) — are likely to give rise to misunderstanding, even if they admit 
of justification when carefully explained. Consider, for example, in 
reference to the above statements, the attempt to refute the doctrine 
of cost of production as the regulator of value by an appeal to certain 
social facts, summed up in the phrase — "immobility of labour and 
capital." If the doctrine is considered purely hypothetical, this ob- 
jection might be dismissed as simply irrelevant. But we cannot think 
that Cairnes would have been content so to dismiss it. In his hands, 
and in those of his school generally, the doctrine means that under 
existing economic conditions cost of production does actually exert 



VII.] NECESSITY OF OBSERVATION. 227 

§ 3. Functions of observation in the employment 
of the deductive method.— The part played by specific 
experience in guiding and giving reality to deductive 
economic reasoning is of the utmost importance. It 
may be said without qualification that political 
economy, whether having recourse to the deductive 
method or not, must both begin with observation and 
end with observation. As already pointed out, there 
is a tendency to forget that the deductive method in 
its complete form consists of three stages, only one of 
which is actually deductive, the two others being the 
inductive determination of premisses, and the inductive 
verification of conclusions. The true character of 
the deductive method is in particular misapprehended 
by those of its critics, who reject its aid in political 
economy on the ground that its employment means 
closing one's eyes to facts, and trying to think out the 
laws of the economic world in entire neglect of what is 
actually taking placed 

a very material influence upon the price of the great majority of com- 
modities. Consider further the doctrine of the existence of grades of 
labour between which competition is sluggish and ineffective. This 
doctrine is indicated by Mill, but is given greater prominence by Cairnes, 
who bases upon it a modification of the received theory of value. By 
appeal to what mental or physical principle, however, can it be said 
to be established? It is rather to be regarded as a modification of 
premisses, suggested by observation and having for its object to bring 
economic theories into closer relation with actual facts. 

^ Speaking of induction as supjjlementary to deduction, Wagner 
observes that "according to our past experience and probably also in 

15—2 



228 THE DEDUCTIVE METHOD. [CHAP. 

It is true that in working out the pure theory of 
economics, the part played by specific observation may 
be subordinated and kept temporarily in the back- 
ground. It is true also that the intellectual bias of 
some investigators naturally inclines them to cultivate 
specially this side of the subject. Again, for purposes 
of illustration, and with the object of familiarising 
ourselves with the kind of reasoning requisite in dealing 
with economic problems, it may sometimes be useful to 
frame hypotheses that have little relation to actual 
facts*. Still it is only partially and temporarily that 
the economist can thus remain independent of specific 
experience. The special functions of observation as 
supplementary to deductive reasoning are at once 
suggested by the analysis of the deductive method 
already given. 

In the first place, observation guides the economist 
in his original choice of premisses. Even in the most 
abstract treatment of political economy, it is necessary 
to begin by considering what are the general character- 
istics actually displayed by men in their economic 
dealings with one another, and by investigating the 

the future, we must expect more from iuductiou as a means of control 
than as an independent method. We shall probably owe to induction 
not so much new results as corrections, refinements, and enlargements 
of propositions obtained in the first instance deductively" {Gnmdleg- 
ung der politisclien Oekonomie, 1892, § 95). 

1 On the subject of illustrative hypothesis, compare Venn, Em- 
pirical Logic, pp. 288, If. 



VII.] FUNCTIONS OF OBSERVATION. 229 

physical and social environment in which their economic 
activities are exercised. As already implied, however, 
it is not necessary that the propositions assumed in 
regard to men's motives or their material and social 
surroundings should be true universally or without 
qualification. To attempt any exact correspondence 
with what has been called the "full empirical actuality" 
"Would be to sacrifice generality, and to involve ourselves 
afresh in those complexities of actual economic life 
from which it is the special object of the deductive 
method temporarily to escape. The requirements are, 
first, that the motives taken into account shall be 
exceptionally powerful in the economic sphere, and so 
far uniform in their operation that the kind of conduct 
deduced from them shall correspond broadly with what 
actually happens ; and, secondly, that the circumstances 
in which the motives are supposed to operate shall 
be of a representative character, either as regards 
economic life in general, or, at any rate, as regards a 
special aspect of it over a given range. 

The observation requisite for the selection of 
premisses may sometimes involve little more than the 
reflective contemplation of certain of the most familiar 
of every-day facts. But it is to be remembered that 
the economist does not always work from one and the 
same set of assumptions ; and in some cases knowledge 
of a much more extended character is required in order 



230 THE DEDUCTIVE METHOD. [CHAP. 

to determine what the premisses shall be. This remark 
applies to the working out of the theory of the foreign 
exchanges, of movements in general prices, of the effects 
of trade-unions or of machinery on wages, and the like. 
In dealing with problems of this kind the necessity 
for a somewhat intimate acquaintance with concrete 
economic phenomena arises at the very commencement 
of our enquiries. The general principles that should 
guide the economist in his selection of premisses will 
be indicated in rather more detail subsequently \ 

In the second place, observation enables the 
economist to determine how nearly his assumptions 
approximate to the actual facts under given economic 
conditions. He thus learns how far his premisses 
require to be modified; or to what extent, where no 
actual modification of premisses is necessary or feasible, 
allowance must be made for the effects of so-called 
disturbing causes. The use of observation for the above 

1 Cairnes observes that "the economist starts with a knowledge of 
ultimate causes" {Logical Method, p. 75) ; but this statement should 
at any rate be limited to the pure theory of economics. As remarked 
by Professor Dunbar in his essay on the Reaction in Political 
Economy, the method to be employed in carrying economic science 
into regions never penetrated by Eicardo is simple; it is only neces- 
sary to draw from the actual observation of affairs fresh premisses 
relating to forces of the secondary order (Quarterly Journal of Eco- 
nomics, October, 1886, p. 10). Professor Marshall's Principles of 
Economics affords numerous striking examples of the fresh develop- 
ments of which deductive political economy guided by observation is 
capable. 



I, 



VII.] FUNCTIONS OF OBSERVATION. 231 

purpose is one of the principal respects in which the 
more concrete is distinguished from the more abstract 
treatment of political economy. Its importance for the 
adequate understanding of the economic phenomena of 
any given period is very great. " Nothing but unreality," 
as Bagehot puts it, "can come of political economy till 
we know when and how far its first assertions are 
true in matter of fact and when and how far they 
are not."^ 

Considering this function of observation from a 
somewhat different standpcfint, it will be seen that 
observation determines the limits of the positive 
validity of laws deductively obtained. The economic 
world is subject to continual changes. Certain as- 
sumptions may be realised at one stage of economic 
progress, and nevertheless be in violent opposition to 
facts at another stage. Hence without the aid of an 
extensive knowledge of facts, there is danger of 
ascribing to economic doctrines a much wider range 
of application than really belongs to them. This point 
will be further considered in treating of the relation 
between economic theory and economic history. 

^ Economic Studies, p. 71. Bagehot himself ihustrates this state- 
ment by an inductive investigation of the effect of differences in the 
real wages of labour upon movements of population. An important 
postulate in regard to the nature of this effect is involved in the 
ordinary deductive determination of laws of normal wages. See also 
Mr L. L. Price's Industrial Peace, pp. 108, ff. 



232 THE DEDUCTIVE METHOD. [C?IAP. 

In the third place, the economist has recourse to 
observation in order to illustrate, test, and confirm his 
deductive inferences. It is important here to observe 
that the verification may, and in fact will generally, 
consist in the satisfactory explanation of actual pheno- 
mena, not necessarily in the discovery of phenomena 
that would justify as direct generalizations the con- 
clusions that have been deductively obtained ^ 

Of course in some cases, instead of any confirmation 
of theory, there will be revealed a clear discrepancy 
between the actual course of events and the results of 
the deductive reasoning, shewing that the latter, if not 
positively erroneous, are at any rate insufficient to 
account for the facts. The problem then is to de- 
termine the source of the error or incompleteness. It 
is possible that empirical enquiry may indicate tl^" 
operation of agencies, exerting an important influenc^ 
upon the phenomena in question, but of which no 

^ Amongst recent economic treatises, Professor Nicholson's Money 
may be mentioned as ayording numerous effective examples of the 
way in which actual occurrences may serve to illustrate and confirm 
deductive arguments. If we want examples, however, we cannot do 
better than go back to the Wealth of Nations. As Professor Marshall 
observes, — "Adam Smith seldom attempted to prove anything by 
detailed induction or history. The data of his proofs were chiefly 
facts that were within everyone's knowledge, facts physical, mental, 
and moral. But he illustrated his proofs by curious and instructive 
facts; he thus gave them life and force, and made his readers feel 
that they were dealing with problems of the real world, and not with 
abstractions." 



VII.] THE PROCESS OF VERIFICATION. 233 

account has been taken^ ; or it may be that whilst the 
right forces have been taken into account, their relative 
strength has been wrongly estimated, or the mode of 
their individual operation miscalculated ; or there may 
have been error in the deductive reasoning itself 

The serious difficulties which sometimes attend the 
process of verification must not be overlooked. Mill 
goes so far as to say that "the ground of confidence in 
any concrete deductive science is not the d priori 
reasoning itself, but the accordance between its results 
and those of observation d posteriori.'"^ This state- 
ment needs to be slightly qualified. For we may have 
independent grounds for believing that our premisses 
correspond with the facts, and that the process of 
deduction is correct ; and we may accordingly have 
confidence in our conclusions, in spite of the fact that 
there is difficulty in obtaining explicit verification. 

There must not of course be a manifest discrepancy 
between our theoretical conclusions and the actual facts. 
But we should not hastily draw negative conclusions, 
or suppose theories overthrown, because instances of 
their operation are not patent to observation. For 
the complexity of the actual economic world, which in 
the first place makes it necessary to have recourse to 

1 The operation of these agencies having once been suggested by- 
observation, it is not improbable that we may be again aided by 
deduction in determining the precise nature of their influence. . 

2 Logic, vi. 9, § 1. 



2:34 THE DEDUCTIVE METHOD. [CHAP. 

the deductive method, may also render it difficult to 
determine whether or not the actual effects of any 
given agency really correspond with the results of our 
deductive calculations^. 

Again, laws of normal value, wages, &c. are, as we 
have already pointed out, verifiable only by instances 
taken in the mass and not by instances taken in- 
dividually. It follows that, as in framing empirical 
generalizations, so in verifying from observation the 
results of deductive reasoning, it is in general necessary 
to extend our investigations over a wide range of facts, 
and especially to allow sufficient time for effects fairly 
to manifest themselves. If these precautions are not 
taken, misunderstanding may easily ensue and economic 
theory be unjustly discredited. 

The doctrine that taxes on commodities are, under 
ordinary conditions, paid by consumers may serve as 
a simple example ; for this doctrine is in no way 
inconsistent with the fact that a new tax may in the 



1 The problem of the effect exerted on general prices by the 
quantity of money in circulation is first worked out deductively, and 
then illustrated and tested by the examination of instances in which 
changes in the amount in circulation have occurred on a considerable 
scale. In some cases the confirmation rnay be very clear and de- 
cisive ; but sometimes there may be the greatest difficulty in allowing 
properly for the effects of an increase or diminution in the general 
volume of trade, for the effects of an expansion or contraction of 
credit, and so forth, the tendency of which is to counteract or exagge- 
rate the effects proper to the cause specially under investigation. 



VII.] THE PROCESS OF VERIFICATION. 235 

first instance bear very heavily upon the industry that 
is taxed. The whole reasoning by which the doctrine 
is established shews that it relates solely to what will 
happen in the long run. In other words, it relates only 
to taxes of old standing or to such as have been long 
anticipated ^. 

As another simple instance, it may be pointed out 
that in accordance with the principles of deductive 
political economy, the repeal of the Corn Laws must 
have tended to bring about a permanent fall in the 
price of wheat in England. Yet no such fall occurred 
immediately. The explanation of the apparent dis- 
crepancy is to be found in the interference of such 
circumstances as the failure of the potato crop, the 
Crimean War, and especially the depreciation of gold, 

1 The deductive theory of the incidence of taxes oh commodities 
has been a frequent source of perverse misunderstanding. "The 
deductive economist's theory of profits and prices," writes Chffe 
Leslie, "will be found to claim to be true, under all circumstances, 
in the case of every individual in trade and of every particular 
article, and to foretell the exact rates at which goods will be sold. 
His theory of taxation is an application of his theory of profits and 
prices; and it proceeds on the assumption that prices will actually 
conform to the cost of production, so nicely in every particular case, 
that every special tax on any commodity will be recovered by the 
producer from the consumer, with a profit on the advance " {Essays, 
1888, p. 229; compare also p. 64). In so far as isolated passages 
from the writings of deductive economists may appear to justify such 
statements as the above, it is only because they have not always been 
sufficiently careful to emphasize the distinction between the imme- 
diate and the ultimate incidence of taxation. 



236 THE DEDUCTIVE METHOD. [CHAP. 

which contributed to maintain the price up to 1862,li 
notwithstanding free trade. Time, moreover, was re- 
quired in order to allow the area of cultivation in new 
countries to be increased, and means of communication 
to be developed, so as to meet the new demand^. 

§ 4. Ricardos use of the deductive inethod. — The 
above considerations indicate certain requirements that 
need to be satisfied in the right use of the deductive 
method, and also certain limitations to which the 
method is subject. \ One essential point is that there 
shall be a clear and definite enunciation of the assump- 
tions upon which any given piece of reasoning is based, j 
Sometimes, in addition to giving a careful explanation 
of the conditions under which the inferred results hold 
good, it will be advantageous to indicate the directions 
in which these results are likely to be modified by 
alterations in the conditions. In discussing the effects 
of economic changes it is further requisite to specify in 
general terms the period of time taken into consideration, 
distinguishing clearly between immediate and ultimate 
effects. It must always be remembered that assumptions 
need to be varied in order to meet varying economic 
circumstances; and a priori dogmatism must be avoided 
in regard to the application of conclusions to any given 
state of society. Before such applications can be justi- 

' Further illustrations of the part played by observation in con- 
nexion with the deductive method will be found in chapters 9 and 10. 



VII.] mcARDo. 237 

fied, empirical tests must be applied — tests, which in 
some cases lie ready enough to hand, but which not in- 
frequently involve systematic observation and statistical 
research of greater difficulty than the deductive reason- 
ing itself 

Ricardo's writings, and in particular his Principles 
of Political Econotny and Taxation, are frequently 
quoted as affording typical and representative examples 
of the use of the deductive method in economics; and any 
objections, to which either his methods or his results 
are open, are accordingly regarded as in all respects 
equivalent to objections to the deductive method as 
such. It must be said, however, that while Ricardo's 
writings contain some of the most brilliant and in- 
structive examples of close deductive reasoning to be 
found in economic literature, and while a thorough 
study and mastery of his works may rightly be re- 
garded as a part of the necessary equipment of the 
economic student, still his manner of employing the 
deductive method is not free from grave faults. For 
instance, the explanations and qualifications, which are 
continually necessary in the interpretation of his results, 
have usually to be supplied by the reader himself. 
Neither the subsidiary postulates, nor those that under- 
lie the greater part of the reasoning, are explicitly 
indicated ; and there is sometimes an unexplained 
change from one hypothesis to another that is specially 



238 THE DEDUCTIVE METHOD. [CHAP. 

perplexing. Again, the necessity of attending to the 
element of time is insufficiently emphasized, and far 
too little importance seems to be attached to the 
characteristics of the jjeriods of transition, during which 
the ultimate effects of economic causes are working 
themselves out. The tone adopted by Ricarclo suggests 
further an undue confidence in the absolute and uni- 
versal validity of the conclusions reached ; and in his 
illustrations there is a remoteness from the facts of 
actual life that is not really essential to the employment 
of the deductive method. 

There is still another respect in which Ricardo's 
chief work fails to satisfy the requirements of a perfect 
deductive system. As a science grows more deductive, 
the logical arrangement of its different parts, and the 
due subordination of some parts to others, become 
considerations of increasing importance. Ricardo, how- 
ever, never makes sufficiently clear the exact relation 
between his different theorems, and the manner of 
their dependence one upon another. In some respects, 
the different chapters of the Pi'inciples of Political 
Economy and Taxation read more like independent 
essays than consecutive chapters of a connected and 
logically complete system. 

An explanation of much of the above is to be found 
in the special circumstances and conditions under which 
Ricardo wrote. While his premisses were suggested 



VII.] RICARDO. 239 

by the actual economic world in which he lived, his 
observation was partial, and confined to a narrow range. 
He was consequently led to interpret his results with- 
out adequate limitation. It is, moreover, very doubtful 
whether it was his deliberate intention to produce 
a complete systematic exposition of economic science. 
It has been suggested on very plausible grounds that 
his chief work was originally written not for publication, 
but with the object of formulating his own ideas on 
various economic questions, and for private circulation . 
amongst an inner circle of acquaintances. If this view 
is correct, the not unfrequent incompleteness of the 
argument from the strictly logical standpoint is to 
a considerable extent accounted for. Nothing can be 
more natural than that anyone writing for those whom 
he knows to be already familiar with his general 
attitude should omit an explicit statement of postulates 
and qualifications, that are certain in any case to be 
present to the minds of his readers \ 

1 Compare a very suggestive note on Rieardo's Use of Facts in the 
Quarterly Journal of Economics, July, 1887, p. 474. Compare, also, 
Letters of Ricardo to Malthus, edited by Dr Bonar. "It is not diffi- 
cult," says the editor, "for men living two generations after Eicardo, 
and having (as he himself expressed it) 'all the wisdom of their 
ancestors and a little more into the bargain,' to point out many 
unjustified assumptions, many ambiguous terms, and even many 
wavering utterances in Rieardo's Principles, in spite of their appear- 
ance of severe logic. The author's detached practical pamphlets were 
in those respects far more powerful than this volume of imperfectly 
connected essays on general theory. The flattering importunities of 



240 THE DEDUCTIVE METHOD. [CHAP. 

Whatever may be the explanation, however, of 
Ricardo's shortcomings, it is certain that the deductive 
method is not exemplified in anything approaching an 
ideal form in his pages. 

§ 5. Tlie premisses of deductive politiccd economy. — 
'In those abstract reasonings, which constitute the most 
prominent part of economic theory, the principles by 
which the economist is guided in his choice of premisses 
are generality and simplicity : the former, in order to 
widen as far as possible the range over which the theory 
may be applicable as an instrument for the solution of 
concrete problems ; the latter, in order that the process 
of deductive reasoning may not be too difficult \ j The 
principle that men desire to increase their sum of 
satisfactions with the smallest possible sacrifice to 
themselves, the law of decreasing final utility as amount 
of commodity increases, the law of diminishing return 
from land, and the like, are premisses which possess 
the requisite degree of universality. The hypothesis 
of free competition, again, affords a fairly simple basis 

friends had induced an unsystematic writer to attempt a systematic 
treatise" (p. xvii). 

1 "The function of a pure theory," says Professor Marshall, "is 
to deduce definite conclusions from definite hypothetical premisses. 
Tiie premisses should approximate as closely as jjossible to the facts 
with which the corresponding applied theory has to deal. But the 
terms used in the pure theory must be capable of exact interpretation, 
and the hypotheses on which it is based must be simple and easily 
handled." 



VIT.] CHOICE OF PREMISSES. 241 

for deductive reasoning, and, so far at any rate as 
modern trade is concerned, is approximately valid in 
relation to a large number of economic phenomena. 
The alternative hypothesis of pure monopoly is in 
certain respects even simpler, but the cases in which 
it is approximately realised cover a much narrower 
area\ 

Passing to the consideration of more concrete 
problems, the above statement requires to be slightly 
modified. The first requirement now is that the pre- 
misses shall ultimately include all the circumstances 
which exert any very important influence upon the 
phenomena in question at the period and place to 
which the investigation has primary reference. The 
second requirement is again one of simplicity. The 
hypotheses adopted should be capable of being made 
the basis of deductive inference ; they should therefore 
take a definite and precise form, and should be as few 
and as simple as is consistent with keeping fairly close 
to the facts \ 

1 Cournot in his Recherches sur les Principes Mathematiques cle la 
TMorie des Richesses takes the hypothesis of pure monopoly on the 
part of sellers as his starting-point. 

2 Wagner, without attempting a complete enumeration of postu- 
lates, gives as the first important hypothesis of deductive economics 
(a) the assumption that everyone acts from economic self-interest 
(Grundlegung der politischen Oekonomie, § 67). To this he adds 
two other fundamental hypotheses, namely, [h) that all concerned 
know and understand their own interests, and (c) that they are not 

K. 16 



242 THE DEDUCTIVE METHOD. [CHAP. 

Bagehot in his unfinished Postulates of Political 
Economy proposed to enumerate the principal assump- 
tions of economic science, and to examine the validity 
or the limits of the validity of each in turn. Such 
an enumeration and examination may under certain 
conditions be highly instructive ; but unless the object 
in view is carefully explained, it may also prove 
misleading. In the use of the deductive method in 
political economy, and especially in the pure theory, 

hindered by law from pursuing tbeir interests. We thus postulate as 
the general basis of our argument (a) the desire, {h) the ability, 
(c) the permission, to act in accordance with the dictates of .self- 
interest. Wagner goes on, however, to point out (§ 70) that each of 
these three assumptions is capable of being modified as circumstances 
may require. Such modifications will of course not be introduced 
arbitrarily, but with the object of making our hypotheses correspond 
more and more nearly with the facts; and the facts will themselves 
vary according to the particular nation, period, place, or class of 
economic phenomena, under investigation. Thus, the first assumption 
may be varied by taking into consideration the operation of other 
motives as co-operating factors along with self-interest; the second 
assumption mny be varied by the recognition of inequalities in the 
knowledge and ability required in order to pursue one's own interests 
to the best advantage, the extent of the modification depending upon 
the particular class of persons under consideration ; the third 
assumption may be varied by considering various ways in which 
individual freedom in economic affairs may be interfered with. 
In these ways Wagner thinks that we may approach more and more 
nearly to complete coincidence between our assumptions and the full 
reality, although it is allowed tliat the altered hypotheses may not 
always be easy to work with, and that the ideal of mathematical 
procedure may not be attainable. It might be added that as our 
general command over the processes of deductive reasoning in 
economics increases, the greater will be our success in working from 
these modified assumptions, 



Vir.] PRELIMINARY ENUMERATION OF PREMISSES. 243 

there are some half dozen premisses that are more 
fundamental and of more constant recurrence than 
others. But unless great care is taken to emphasize the 
distinction between abstract and concrete economics, the 
recognition of a limited number of definite assumptions 
as fundamental and sufficient tends to give to the 
science a formal and unreal aspect that is not properly 
characteristic of it considered in its totality ^ 

The validity, moreover, of economic postulates 
varies not only from time to time, and place to place, 
but also in different connexions at the same time and 
place. Hence even if a preliminary enumeration of 
premisses, supposed to underlie the whole science of 
economics, were really feasible, it would not be possible 
to examine once for all the validity of such premisses ; 
and on the whole it seems best to regard any pre- 
liminary enumeration and examination of economic 
postulates, not as definitive or exhaustive, but simply 
as illustrative of the general character of economic 
theory^ 

1 The notion that the whole of the science is built up from just 
one or two i^reiiiisses has always been seized upon for comment by 
adverse critics. Compare, for instance, Mr Frederic Harrison's 
criticism that "political economy has two postulates — production as 
the sole end, competition as the sole motive — postulates of which the 
human race and its history can shew no actual example." 

2 The enumeration of postulates pro]DOsed by Bagehot was unfor- 
tunately never completed. Enumerations of the kind referred to will, 
however, be found in Senior, Political Economy, p. 26; Cairnes, 

16—2 



244 THE DEDUCTIVE METHOD. [CHAP. 

I 6. Special modifications of the deductive method. — 
There are certain modifications of the deductive method 

Logical Method, Lecture 2, § 2, and Lecture 3, § 1 ; Cossa, Introduction 
to the Study of Political Economi/, Theoretical Part, Chapter 6, § 2 ; 
Sidgwick, Principles of Political Economy, 3rd edition, Introduction, 
Chapter 3, § 4. Compare also the pof5tulates formulated by Wagner, 
as given in the note on page 241. It may be useful to quote from 
Senior and Cairnes. Senior says, "We have already stated that the 
general facts on which the science of political economy rests are 
comprised in a few general propositions, the resiilt of observation or 
consciousness. The propositions to which we then alluded are these: — • 
1. That every man desires to obtain additional wealth with as little 
sacrifice as possible. 2. That the population of the world, or, in 
other words, the number of persons inhabiting it, is limited only by 
moral or physical evil, or by fear of a deficiency of those articles of 
wealth which the habits of the individuals of each class of its inhabit- 
ants lead them to require. 3. That the powers of labour, and of the 
other instruments which produce wealth, may be indefinitely increased 
by using their products as the means of further production. 4. That, 
agricultural skill remaining the same, additional labour emj^loyed on 
the land within a given district produces in general a less propor- 
tionate return, or, in other words, that though, with every increase of 
the labour bestowed, the aggregate return is increased, the increase of 
the return is not in proportion to the increase of the labour. " Cairnes 
indicates the following as the ultimate premisses of economic science, 
— first, "the general desire for physical well-being, and for wealth as 
the means of obtaining it"; next, "the intellectual power of judging 
of the efficacy of means to an end, along with the inehnation to reach 
our ends by the easiest and shortest means " ; thirdly, " those propen- 
sities which, in conjunction with the physiological conditions of the 
human frame, determine the laws of population"; and lastly, "the 
physical qualities of the soil and of those other natural agents on 
which the labour and ingenuity of man are employed." It is clear 
that such enumerations as these cannot lay claim to completeness. 
Some postulate is, for example, essential in regard to the nature of 
the social customs and legal institutions relating to property. Some 
postulate is also requisite in regard to the variation of utility with 
amount of commodity ; for it would not be possible from Senior's or 



VII.] THE DEDUCTIVE METHOD. 245 

which render it comparatively easy to deal effectively 
with problems of considerable intricacy. It is particu- 

Caimes's premisses alone to deduce laws of demand. Even the 
principle of free competition is not clearly enunciated. This principle 
is indeed so complex, and involves so many different subsidiary 
assumptions in different connexions, that it would be difficult to 
analyse once for all its full content in the various economic reason- 
ings in which it plays a part. 

A well-arranged enumeration of postulates is given by Mr W. E. 
Johnson in his article on the Method of Political Economy in 
Mr Palgrave's Dictionary of Political Economy. Mr Johnson does 
not profess that any complete enumeration of premisses is possible. 
Agreeing, however, with the view taken in the text, he considers that 
there are some half dozen premisses which may be regarded as typical 
and which are almost universally applied. " Of these six data, two 
belong to each of the divisions, physical, psychological, and social. 
(1) The two physical or natural laws presupposed are the law of 
Diminishing Eeturns, which arises from the necessity of having 
recourse to inferior agents of production, or to their use under less 
advantageous circumstances ; and the law of Increasing Eeturns, 
which results from the increased possibilities of industrial organisation 
under extension of supply. But these laws represent tendencies 
ascertained by ordinary observation, which work in opposite direc- 
tions. Hence more exact knowledge as to the magnitude of the 
forces in particular circumstances has to be supplied by further 
detailed observation. (2) The two psychological data are general 
expressions of the nature of Demand and of Supply, so far as these 
depend on the characters of individuals. The law of demand is to the 
effect that the utility afforded by any increment of any kind of desired 
object diminishes with increase of the amount possessed : the law of 
supply is to the effect that every one tries to procure material well- 
being with the least possible sacrifice. These assumptions are common 
to almost all economic reasonings of a deductive type, though they 
are not always explicitly formulated. Here, as in the case of the 
physical presuppositions, further detailed observation is required to 
determine the precise degree in which these psychological forces act 
under any circumstances. In particular, the law of supply requires 
to be made more definite by an estimate of the influences of habit. 



246 THE DEDUCTIVE METHOD. [CHAP. 

larly helpful to work up gradually from simple to more 
and more complex hypotheses. The conditions assumed 
at the outset may ftxil to represent even approximately 
the actual facts. But the problem having first been 
treated in the simplest conceivable form, it may be 
possible to grapple with it under somewhat less simple 
conditions. And so- we may go on, until at last the 
assumptions do fairly correspond with the facts. As 
remarked by Bagehot, " the maxim of science is simply 
that of common sense — simple cases first ; begin with 
seeing how the main force acts when there is as little 
as possible to impede it, and when you thoroughly 
comprehend that, add to it in succession the separate 
effects of each of the encumbering and interfering 
agencies."^ 

Mill's working out of the theory of international 
values affords a. familiar example of the above method 
of procedure. He begins by supposing that inter- 
national dealings are carried on between two countries 

inertia, ignorance, or custom, wlaich materially affect its application. 
(3) The two sociological data relate to the conditions of freedom and 
restraint under which the economic activities of a community take 
place. Speaking generally, it is assumed on the one hand that 
individual action is controlled by certain legalised institutions with 
regard to property, and, on the other hand, that individuals are free 
to act according to their own will within certain limits. A similar 
remark applies here, as before, namely, that the precise degree of 
freedom or of restraint, operative under any circumstances, has to be 
determined by specific observation." 
' Economic Studies, j). 74. 



VII.] mill's theory of international values. 247 

only, and in two commodities only, which commodities 
are directly exchanged the one for the other, without 
the intervention of money in any form. The countries 
are supposed contiguous, so that cost of carriage may 
be left out of account ; neither country has any inter- 
national liabilities except in payment for imports ; and 
complete free trade exists, neither export nor import 
duties being imposed on either side. The problem 
having in this simplified form been solved, the various 
limitations are one by one removed until an hypothesis 
is at last reached that includes all the essential con- 
ditions of actual trade between different communities. 
Similarly, in seeking to determine the circumstances 
that regulate the range of general prices, the most 
serviceable method is to begin with a very simple 
artificial hypothesis, and thence pass gradually to the 
complex realities of modern traded 

^ Compare Professor Nicholson's treatment of this problem in his 
book on Money and Monetary Problems. He begins as follows,— 
"Now, under the present conditions of industry and exchange, the 
causes which lead to general movements of prices are exceedingly 
complex and various, and in order to understand them it is neces- 
sary to begin with the simplest case, and then gradually to introduce 
the less obvious, though equally effective, causes of movemeifc. I 
would then beg the reader to get rid, as far as possible, of all the 
notions he may have formed of the causes of the actual movements 
in prices in recent years in the complex industrial world of to-day, 
and, in order to isolate and examine the most important cause of all, 
to take up an attitude of observation in what, for fault of a better 
term, may be called a 'hypothetical market.' The phrase is sug- 



248 THE DEDUCTIVE METHOD. [CHAP. 

Another interesting and useful variety of the 
deductive method is where a number of alternative 
conditions are taken, which between them cover all 
cases that are practically possible, and an enquiry is 
instituted as to what will happen under each in turn. 
In this way the limits within which the truth will lie 
may be determined ; and in so far as it is possible in 
any concrete instance to discover the relation of the 
actual to the hypothetical conditions, the deductive 
solution may be turned to practical account. Unless 
the different alternatives are formal contradictories, 
a preliminary investigation of facts will of course be 

gestive of unreality, but no more so thau the suppositions or hypo- 
theses constantly made in physics and mathematics, of bodies per- 
fectly rigid, smooth, or without weight, or of lines without breadth, 
or of points without parts or magnitude. Let the following, then, be 
assumed as the laws and conditions of our market : (1) No exchanges 
are to be made unless money (which, to be quite unreal and simple, 
we may suj^pose to consist of counters of a certain size made of the 
bones of the dodo) actually passes from hand to hand at every transac- 
tion. If, for example, one merchant has two pipes but no tobacco, 
and another two ounces of tobacco but no pipe, we cannot allow an 
exchange of a pipe for an ounce of tobacco unless money is used. 
Credit and barter are alike unknown. (2) The money is to be 
regarded as of no use whatever except to effect exchanges, so that 
it will not be withheld for hoarding ; in other words, it will be actually 
in circulation. (3) Let it be assumed that there are ten traders, 
each with one commodity and no money, and one trader with all the 
money (100 pieces) and no commodities. Further, let this moneyed 
man place an equal estimation on all the commodities" (p. 56). All 
this sounds artificial enough ; but it is only the starting-point. Before 
the discussion is finished, the reader finds himself dealing with actual 
concrete problems of to-day. 



VII.] ALTERNATIVE HYPOTHESES. 249 

necessary in order to determine what alternatives 
should be chosen. 

Let the problem be to determine the ultimate 
consequences of a strike of workmen, its immediate 
success being assumed. Enquiry may be made as to 
what will happen under three different suppositions : 
first, in so far as the rise in wages leads to an increase 
of efficiency on the part of the workmen, and is therefore 
not at the expense of other members of the community ; 
secondly, in so far as it raises prices, and is therefore 
at the expense of consumers ; thirdly, in so far as it 
lowers profits, and is therefore at the expense either 
of earnings of management or of interest. In the first 
of these cases, there is, ceteris paribus, no reason why 
the success of the strike should not be permanent. 
In the second case, it is necessary to consider the 
possibility of a reaction in so far as higher prices lead 
ultimately to the use of substitutes or stimulate 
foreign competition^ Besides this, there is a further 
subdivision of alternatives according as, before the 
strike, wages in the given trade were or were not below 
the general level of wages (of course taking into account 
the net advantages of different occupations). If they 
were, then, except for the reasons suggested above, 
there need be no reaction, and the strike may merely 

1 And in tkese circumstances the effects on wages in allied trades 
have also to be considered. 



250 THE DliDUCTIVE METHOD. [CHAP. 

have expedited a rise that woukl inevitably have 
occurred sooner or later. If, however, wages were 
already at the normal level, then after the rise there 
is likely to be a reaction in consequence of an influx 
of labour from other trades, the extent to which this 
happens and its rapidity depending on the effectiveness 
of competition. Under the third original hypothesis, 
there is again a subdivision of alternatives according as 
before the strike profits were or were not abnormally 
high in the trade in question. If they were, the rise 
in wages is likely to be maintained, although if com- 
petition is effective it may have to be shared with 
other trades. If profits were not abnormally high, 
then capital and business power may move to other 
trades; and ultimately the question arises how far 
either earnings of management or interest generally 
will bear reduction without reacting seriously on the 
demand for labour. 

The above is of course not intended as an actual 
solution of the given problem, but only as an illustration 
in bare outline of the manner in which it may be dealt 
with by the deductive method. We see how by the 
aid of the deductive method an analysis can be given 
which will enable us to understand our whereabouts, 
so that if we wish to investigate any actual case we 
may know what are the special facts for which it is 
most important to look. 



VII.] MATHEMATICAL METHODS. 251 

There are other modifications of the deductive 
method in which use is made of mathematical symbols 
and diagrams. The nature of the aid that can thus be 
afforded is discussed in the following chapter. 



CHAPTER VIII. 

ON SYMBOLICAL AND DIAGRAMMATIC METHODS 
IN POLITICAL ECONOMY. 

§ 1. Mathematical character of political economy. — 
Political economy is declared by Jevons to be essentially 
mathematical in character ; and if the term mathematical 
is used in a broad sense so as to include all enquiries 
that deal with quantitative relations, the propriety 
of thus describing the science admits of easy demon- 
stration. For political economy is not concerned simply 
with questions as to whether events will or will not 
happen. It deals with phenomena whose quantitative 
aspect is of fundamental importance, and one of its 
main objects is to determine the laws regulating the 
rise and fall of these phenomena. Its principal theorems 
relate accordingly to the manner in which variations of 
one quantity depend on variations of another quantity. 

The quantitative, and therefore in a broad sense 
mathematical, character of economic reasonings might 
be illustrated by opening almost at random any eco- 
nomic work that fairly covers the ground of the science. 



CHAP. VIII.] MATHEMATICAL CONCEPTIONS. 253 

Thus Mill in his treatment of supply and demand as 
regulators of value introduces conceptions that are 
strictly mathematical. He insists, for example, that 
the idea of a ratio between supply and demand is out 
of place, what is really involved being an equation. 
Other instances are afforded by his general treatment 
of the value of money, and his theory of international 
values. In the latter case he employs undisguised 
mathematical formulae ^ If further illustrations are 
wanted, it may be pointed out that all discussions 
concerning a measure of value, involving as they do 
the conception of a unit, are intrinsically mathematical 
in character. Methods of measuring changes in the 
purchasing power of money must also of necessity be 
based upon mathematical considerations. 

The fact that political economy is essentially con- 
cerned with quantitative relations, and therefore 
involves mathematical notions, needs to be insisted 
upon, because to some economists the very idea of a 
mathematical treatment of economic problems is not 
only repugnant, but seems even absurd; and further 
because the importance of seeking to make our 
economic conceptions quantitatively precise has not 
always received due recognition. Something more 
than the above, however, is needed in order to establish 
the position that economic knowledge can be advanced 

1 Principles of Political Economy, Book in, Chapter 18, § 7. 



254 MATHEMATICAL METHODS. [CHAP. 

by the explicit use of geometrical diagrams or mathe- 
matical formulae. Simple quantitative relations can 
after all be clearly expressed in the forms of ordinary 
speech ; and the need of careful quantitative analysis 
may accordingly be admitted, whilst there remains 
an unwillingness to have recourse to mathematical 
symbolism. We are thus still left with a question 
of method demanding discussion ; and the object of 
the present chapter is briefly to enquire what is the 
nature of the advantage, if any, to be derived from 
the use of mathematical formulae and diagrams in 
economic reasonings ^ 

§ 2. The employment of arithmetical examples. — 
Up to comparatively recent years, the mathematics 
introduced into ordinary economic treatises has for the 
most part taken the form of arithmetical examples ; 
and a word or two may be said at this point in regard 

1 It may here be pointed out that mathematical methods in 
economics fall into two subdivisions, the algebraic and the diagram- 
matic. The ai^plication of the former requires knowledge of various 
technical processes, and as employed by Cournot and Jevons involves 
the infinitesimal calculus. The diagrammatic or graphic method, on 
the other hand, requires no more than an elementary knowledge of 
the first principles of geometry. The two methods are frequently 
combined. It is to be observed that diagrams lend themselves 
naturally to the registering of statistics, while to express statistics 
equationally is not possible until tlieir laws have been determined. 
The emijloyment of diagrammatic methods by the theorist is ac- 
cordingly more likely than that of algebraic methods to be indirectly 
of assistance to the statistician. 



VIII.] ARITHMETICAL EXAMPLES. 255 

to the part capable of being played by such examples 
in political economy. By taking particular numerical 
premisses and working out results, we may illustrate 
conclusions that have been obtained by means of 
ordinary reasoning processes ; and hypothetical illus- 
trations of this kind are certainly not without value. 
By their help students are likely to be materially 
assisted towards understanding the operation of such 
laws as that of supply and demand. Numerical 
examples have, moreover, a probative force in certain 
cases where it is not desired to do more than disprove 
a universal proposition, or — what comes to the same 
thing — establish a particular one ; as, for instance, if 
we merely wish to shew that it may he profitable for 
a country to import commodities that it could itself 
have produced with a less expenditure of effort than 
is required in the country from which it obtains 
them. 

The citation of examples is not, however, a method 
whereby general conclusions can be obtained ; and the 
use of arithmetical illustrations may involve the danger 
of our forgetting that after all they are nothing more 
than illustrations. It is difficult or even impossible to 
guarantee the typical or representative character of the 
particular numerical data that have been selected, or 
to be certain that if they were varied the same general 
conclusion would always result. The consequence may 



256 MATHEMATICAL METHODS. [CHAP 

be a failure to discriminate between that which is 
essential and that which is merely accidental'. 

§ 3. Exact numerical p7'em.isses not essential to the 
employment of mathematical methods. — If the use of 
mathematical symbols and diagrams is rightly to be 
called a method, it must do more than yield merely 
isolated examples, and must be free from imperfections 
such as those just pointed out. The economist must by 
the aid of his symbols and diagrams be enabled to deduce 
conclusions having general validity under conditions 
that can be precisely determined. It is, however, 
necessary here to guard against a misapprehension 
that has led some economists to reject mathematical 
methods far too summarily. Professor Cairnes, for 
instance, seems to imply that the employment of such 
methods is necessarily barren unless we can obtain 
premisses capable of being stated with numerical 
accuracy ^ He is here indeed only following in the 
footsteps of Mill, who remarks that mathematical 
principles are " manifestly inapplicable, where the 
causes on which any class of phenomena depend are 
so imperfectly accessible to our observation, that we 

1 A noteworthy instance in which the employment of a numerical 
example leads to error of the above-mentioned kind is to be found in 
Mill's Political Economy, Book iv, Chapter 3, § 4. This is pointed 
out by Professor and Mrs Marshall in their Economics of Industry, 
p. 85, note. 

2 Logical Method, 1875, p. vii. 



1 



VIII.] NUMERICAL DATA UNATTAINABLE. 257 

cannot ascertain, by a proper induction, their numerical 
laws."* Professor Cliffe Leslie argues similarly against 
the application of mathematics to political economy on 
the ground that economic premisses are not capable of 
exact quantitative determination I And Dr Ingram 
says bluntly, — " The great objection to the use of 
mathematics in economic reasoning is that it is neces- 
sarily sterile. If we examine the attempts which 
have been made to employ it, we shall find that the 
fundamental conceptions on which the deductions are 
made to rest are vague, indeed metaphysical, in their 
character. Quantitative conclusions imply quantitative 
premisses, and these are wanting. There is then no 
future for this kind of study, and it is only waste of 
intellectual power to pursue it."^ 

The inipossibility of obtaining exact numerical 
premisses in political economy is fully recognised by 
Coumot and other mathematical economists. But at 
the same time they shew clearly that such premisses 
are not always essential to the employment of mathe- 
matical methods. Cournot, for instance, remarks that 
Avhile the law of demand for any commodity might 
conceivably be expressed by an empirical formula or 
curve, we cannot as a matter of fact hope to obtain 

^ Logic, Book iii, Chapter 24, § 9. 
• 2 Essays in Political and Moral Philosophy, 1888, pp. 69, 70. 
2 History of Political Economy pp. 181, 2, 

K. 17 



258 MATHEMATICAL METHODS. [CHAP, 

observations sufficiently numerous or exact for this 
purpose. But he adds that it by no means follows 
that the unknown law of demand cannot by means 
of symbols be usefully introduced into analytic com- 
binations. For one of the most important functions 
of mathematical analysis is to discover determinate 
relations between quantities whose numerical values are 
unassignable. Functions, while remaining numerically 
unknown, may possess known properties; and on the 
assumption that certain general relations between 
quantities hold good, it may be possible mathematically 
to deduce further relations that could otherwise hardly 
have been determined \ 

^ Principes Mathematiqites de la Theorie des RicJiesses, § 21. 
Again, in his preface, Cournot remarks that some economists seem to 
have a false notion of the nature of the applications of mathematical 
analysis to political economy. "On s'est figure que I'emiiloi des 
signes et des formules ne pouvait avoir d'autre but que celui de 
conduire h, des calculs numeriques ; et comme on sentait bien que le 
sujet repugne a cette determination numerique des valeurs d'apres 
la seule theorie, on en a conclu que I'appareil des formules 6tait, 
sinon susceptible d'induire en erreur, au moins oiseux et pedantesque. 
Mais les personnes vers^cs dans I'analyse mathematique savent 
qu'elle n'a pas seulement pour objet de calculer des nombres ; qu'elle 
est aussi employee a trouver des relations entre des grandeurs que I'on 
ne pent evaluer num^riquement, entre des fonctions dout la loi n'est 
pas susceptible de s'exprimer pav des symboles alg^briques" (pp. vii, 
viii). The possibility of mathematical reasoning without numerical 
data is discussed and illustrated in considerable detail by Professor 
Edgeworth in his Matliematical Pajjchics, pp. 1 — 9, and 8.3 — 93. " It 
is necessary," he says, "to realise that mathematical reasoning is not, 
as commonly supposed, limited to subjects where numerical data are 
attainable. Where there are data which though not mimerical are 



VIII.] COURNOT. 259 

Cournot himself exemplifies the process which he 
thus describes. He starts with simple formulae to 
express relations between demand and price, cost of 
production and price, and the like, and assuming that 
these relations will conform to certain specified con- 
ditions, deduces by mathematical manipulation some 
of the consequences resulting therefrom. He deduces, 
for example, with the greatest clearness and precision 
the general laws determining what price will yield to a 
monopolist a maximum profit ; and he then proceeds to 
deal with the difficult problem of the incidence, under 
different suppositions, of taxes on monopolies. Other 
problems are treated in a similar manner with more or 
less success ; and at no point in the reasoning is it 
essential that numerical values should be assigned to 
the symbols. 

What is true of algebraical formulae is true of 
diagrams also. Representing, for example, by a curve 
the manner in which the demand for a commodity varies 
with its price, general laws to which this curve will 
conform may be determined, and results deduced. But 



quantitative — for example, that a quantity is greater or less than 
another, increases or decreases, is iwsitive or negative, a maximum or 
minimum — there mathematical reasoning is possible and may be 
indispensable. To take a trivial instance: a is greater than h, and 
h is greater than c, therefore, a is greater than c. Here is mathe- 
matical reasoning applicable to quantities which may not be sus- 
ceptible of numerical evaluation." 

17—2 



260 MATHEMATICAL METHODS. [CHAP. 

this does not necessitate that curves of demand for 
different commodities should be capable of being drawn 
with numerical accuracy. 

§ 4. Advantages resulting from the use of symbolical 
and diagrammatic methods in political economy. — The 
employment of symbolical and graphic methods in- 
dependently of specific numerical data is of course 
confined mainly, if not wholly, to the pure or abstract 
theory. Those, therefore, who deny the utility of 
abstract political economy in any form, and maintain 
that the only fruitful method of economic enquiry is 
inductive and empirical, will naturally reject mathe- 
matics as an instrument. This general question has, 
however, been sufficiently discussed already; and, there- 
fore, in briefly enquiring what kind of advantages may 
result from the employment of mathematical methods, 
it will be taken for granted that the economist ought 
sometimes to have recourse to abstract and deductive 
reasoning. The advantages are partly direct, and partly 
indirect ; and a brief reference may in the first place be 
made to the latter. 

When mathematical processes are employed in the 
solution of a problem, attention can hardly fail to be 
called to the conditions assumed as the basis of the 
argument, and due importance is likely to be attached 
to the exact enunciation of these conditions; a more 
thoroughgoing quantitative analysis of fundamental 



VIII.] PRECISION OF REASONING. 261 

conceptions is also necessary ; it becomes less easy to 
slur over steps in the reasoning; and difficulties are 
brought to light that might otherwise have remained 
hidden. Hence there arises a higher standard of precision 
in abstract economic reasonings, even in cases where 
non-mathematical methods are still employed. As 
a further consequence, a check is put upon the tendency 
to overlook the limitations to which purely abstract 
and deductive methods of reasoning are subject. 
Professor Foxwell has well remarked that " there is no 
greater safeguard against the misapplication of theory 
than the precise expression of it"; and he rightly 
indicates that precise expression is necessitated when 
use is made of mathematical analysis^. It is now 
generally recognised that the introduction of mathe- 
matical methods and habits of thought into economics 
has exerted a wide-reaching and important educational 
influence in stimulating precision both of thought and of 
expression, and hence eliminating errors due to slovenly 
and inaccurate reasoning^. 

^ Quarterly Journal of Economics, October, 1887, p. 90. 

2 Mr L. L. Price points out in an eifective passage that the 
mathematical and historical methods have, in spite of their 
apparent antagonism, co-operated with one another in helping 
to make economic theory more accurate and more comprehensive. 
"By emphasising its limiting conditions, the historical treatment 
has checked the misapplication of theory; and the mathematical 
treatment, proceeding from a different starting-point by a different 
road, has reached the same goal, and tended to induce greater 
precision of statement" [Economic Science and Practice, p. 309). 



262 MATHEMATICAL METHODS. [CHAP, 

Amongst the characteristic direct advantages of 
mathematical analysis and diagrammatic representation 
is the fact that the significance of continuity in the 
variations of phenomena is brought into prominence. 
This remark applies pre-eminently to the diagrammatic 
treatment of the law of supply and demand. Such 
a treatment affords, for example, the simplest means 
of dealing with the ingenious criticisms to which 
Mr Thornton has subjected this law. He adduces cases 
which at first sight look like exceptions overturning 
the law altogether; but the method of diagrams at 
once shews them to be extreme or limiting cases due 
to a break in the continuity either of demand or of 
supply. They are thus accounted for, and their true 
signification easily apprehended^. 

Another characteristic advantage of mathematical 
methods is increased power of treating variables {e.g., 
demand, cost of production) in their true character, 
and not as constants. Professor Edgeworth observes 
that "to treat variables as constants is the characteristic 
vice of the unmathematical economist."'- So to treat 
them may indeed be necessary for purposes of simplifi- 
cation, if we are limited to the comparatively clumsy 
instrument afforded by ordinary language and ordinary 

^ Compare Thornton, On Labour, Book ii, Chapter 1; and Pro- 
fessor Fleeming Jenkin's essay on "the Graphic Representation of the 
Laws of Supply and Demand, and tlreir Application to Labour." 

- Mathematical Psydiics, p. 127, note. 



^ 



VIII.] VARIABLES AND CONSTANTS. 263 

prepositional forms. It is, however, clear that under 
such conditions the solution obtained cannot be re- 
garded as more than a first approximation. Many of 
Ricardo's and Mill's reasonings are in this way rendered 
incomplete ; for example, in discussing the incidence 
of tithes, and the effects of agricultural improvements, 
they assume that demand is unaffected by a rise or fall 
in price. A more striking and important instance is 
to be found in the treatment of cost of production as 
a constant, and the consequent failure to recognise the 
part played by demand in the determination of normal, 
as well as market, value. It is true that in the earlier 
editions of his Economics of Industry Professor Marshall 
expounded the correct theory without any explicit 
reference to symbols or diagrams. But it is no secret 
that his important contributions to the theory of value 
are mainly to be attributed to insight gained through 
working at economics mathematically on the lines first 
indicated by Cournot. It may be added that the full 
force and signification of Professor Marshall's theories 
are best apprehended by the aid of diagrams, even 
where their use is not absolutely necessary ; and that 
in certain of the more complex developments of the 
theories, some assistance of a symbolical kind remains 
essential. 

A point closely connected with the one just con- 
sidered is the assistance which mathematical methods 



264 MATHEMATICAL METHODS. [CHAP, 

afford towards understanding the relation of mutual 
dependence which may subsist between different 
phenomena, e.g., supply, demand, and price. This 
conception is of central importance in economics. 
For, as Professor Marshall has observed, "just as the 
motion of every body in the solar system affects and 
is affected by the motion of every other, so it is with 
the elements of the problem of political economy." 
The conception is, however, one that is found to be 
specially difficult of realisation by those who are with- 
out mathematical training. Arguments involving this 
conception are, moreover, apt to be lengthy, as well 
as difficult to follow, if expressed wholly in ordinary 
language ^ 

It may, indeed, be added as amongst the special 
advantages of mathematical methods that they lead 
not only to accuracy and precision, but also to concise- 
ness and the avoidance of circumlocution. In some 
cases it is possible by means of a single diagram to 
make intelligible at a glance what would otherwise 
require a more or less elaborate explanation. This re- 
mark applies to the ambiguity of the phrase increase of 
demand, pointed out by Professor Sidgwick-. The real 
import of the distinction between a mere extension 

1 Compare Professor Edgeworth's British Association Address on 
the Application of Mathematics to Political Economy, Statistical 
Journal, December, 1889, p. 5-11. 

•2 Principles of Political Economy, 1901, p. 186. 



1 



VIII.] EXPLANATIONS FACILITATED BY DIAGRAMS, 265 

of demand due to a fall in price, and an intensification 
of demand at a given price, can be made more clear by 
the aid of a diagram than by a long verbal explanation. 
The effects of an intensification of demand can also be 
more quickly and easily realised by diagrammatic aid 
than in any other way\ 

Much of the above is well expressed by Cournot 
in his remark that "even when the employment of 
mathematical signs is not absolutely necessary, it can 
facilitate the exposition, make it more concise, put it 
on the way towards more extended developments, and 
prevent digressions of vague argumentation."^ 

It can, however, hardly be affirmed that there are 
economic truths of fundamental importance which are 
incapable of being expounded except in a mathematical 
form. Jevons's theory of utility and its applications 
are in many respects the most striking outcome of 



^ Other illustrations are given by Professor Edgeworth in his 
British Association Address. "In the case of international trade," 
he remarks, "the various effects of a tax or other impediment, 
which most students find it so difficult to trace in Mill's la- 
borious chapters, are visible almost at a glance by the aid of the 
mathematical instrument. It takes Professor Sidgwiek a good many 
words to convey by way of a particular instance that it is possible for 
a nation by a judiciously regulated tariff to benefit itself at the 
expense of the foreigner. The truth in its generality is more clearly 
contemplated by the aid of diagrams such as those employed by the 
eminent mathematical economists Messrs Auspitz and Lieben" 
{Statistical Journal, December, 1889, p. 540). 

- Principes MatMmatiques, p. viii. 



266 MATHEMATICAL METHODS. [CHAP. 

mathematical economics ; and it is difficult to do full 
justice to this theory unassisted by mathematical 
methods. Nevertheless, without the explicit use of 
diagrams or algebraical formulae, what is essentially 
the same theory has been independently worked out 
by Menger and the Austrian school^. 

' Menger's Gnouhdtze der VolkswirtliscJiaftslehre was published 
in 1871, the same year as that in which Jevons's Theory of Political 
Economy appeared. It may be said that the work of Meuger and his 
followers is mathematical in tone, though not in language. Professor 
Walras of Lausanne, another independent worker in the same field, 
is like Jevons an ardent champion of mathematical methods. So is 
Mr Wicksteed, who in his Alphabet of Economic Science retains the 
mathematical form, and expounds Jevons's doctrines with admirable 
clearness. Professor Marshall is a mathematical economist of a 
different type inasmuch as — unlike Jevons and Walras, and also 
unlike Cournot, with whom he has in many respects more affinity" — he 
subordinates his mathematics. He employs diagrams for the illustra- 
tion and further development of his theories, but shews that his main 
doctrines are capable of being expressed without mathematical aids. 
He here proceeds on the principle that even in cases where mathe- 
matical symbolism is specially appropriate, and even where truths have 
actually been reached wholly or partially through the instrumentality 
of mathematical analysis, still some effort may rightly be made to 
avoid the use of mathematics in writing for the general economic 
public. The reason for this, like most other points connected with 
the subject under discussion, is very happily expressed by Professor 
Edgeworth. "Mathematics," he says, "is as it were the universal 
language of the physical sciences. It is for physicists what Latin 
used to be for scholars ; but it is unfortunately Greek to many 
economists. Hence the writer who wishes to be widely read — who 
does not say, with the French author, J'imprime pour nioi — will^do 
well not to multiply mathematical technicalities beyond the indis- 
pensable minimum, which we have seen reason to suppose is not very 
large. The parsimony of symbols, which is often an elegance in the 
physicist, is a necessity for the economist." 



VIII.] SUMMARY. 267 

On the whole, we arrive at the conclusions, 
first, that political economy involves conceptions of 
a mathematical nature requiring to be analysed in 
a mathematical spirit; and secondly, that there are 
certain departments of the science in which valuable 
aid may be derived from the actual employment of 
symbolical or diagrammatic methods. Mathematics 
may not up to the present time have proved an 
absolutely indispensable instrument of economic in- 
vestigation and exposition; but it would be difficult 
to exaggerate the gain that has resulted from the 
application of mathematical ideas to the central 
problems of economic theory. 



CHAPTER IX. 

ON POLITICAL ECONOMY AND ECONOMIC HISTORY. 

§ 1. Ftinctionfi of economic history in theoretical 
investigations. — The nature of the distinction between 
economic history and economic theory, though some- 
times apparently overlooked, needs no detailed discus- 
sion. The former describes the economic phenomena 
existing at any given period in the past, and traces 
the actual progress of such phenomena over successive 
periods ; the latter seeks to determine the uniformities of 
coexistence and sequence to which economic phenomena 
are subject. The propositions of economic history are 
accordingly statements of particular concrete facts ; 
economic theory, on the other hand, is concerned with 
the establishment of general laws. 

Neither of the two can take the place of the other. 
For, on the one hand, mere historical research cannot by 
itself suffice for the solution of theoretical problems; and, 
on the other hand, the actual evolution of economic 
habits and conditions cannot be constructed d priori. 



CHAP. IX.] STUDY OF ECONOMIC DEVELOPMENT. 269 

At the same time, economic history and economic 
theory in different ways assist and control one another ; 
and their mutual relations become specially important 
as the history approaches the period with which the 
theory is more particularly concerned. 

Reference may first of all be made to the desirability 
of a general historical study of the gradual development 
of those phenomena which are made the subject of 
theoretical enquiry. This applies to any treatment of 
economics that is not of the most abstract character. 
Thus, independently of any assistance that may be 
derived from actual historical generalizations, we shall 
gain a clearer insight into the general principles now 
regulating the distribution of wealth in England, if we 
can follow the process of development through which 
our system of distribution has passed. The really 
characteristic and significant features of the existing 
system will in this way be more distinctly perceived, 
and their economic consequences more exactly traced. 

As an instance of a more special character, it 
may be observed that certain of the problems to 
which trade-unionism gives rise are more likely to 
be effectively dealt with, if attention is paid to the 
circumstances in which trade-unions originated. An- 
other simple instance is to be found in the theory of 
the London Money Market, and the influence exerted 
therein by the Bank of England, The present position 



270 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP. 

and functions of the Bank in the Money Market cannot 
be properly understood, as Mr Bagehot shews in Lombard 
Street, unless account is taken of its origin and history. 
It may be added that in the treatment of the general 
theory of modern banking, it is helpful to study the 
different ways in which modern banks had their be- 
ginning, and the various purposes which it was their 
original object to fulfil. 

In a similar way, most theoretical enquiries, unless 
they are of a particularly abstract and general character, 
may with advantage commence with a brief historical 
introduction, tracing the mode of development of the 
phenomena under discussion. 

The kind of aid, however, which the theorist thus 
gains from studying the evolution of economic phe- 
nomena, though very real, is indirect and perhaps 
somewhat indefinite. The more specific functions of 
economic history in connexion with the theoretical 
problems of political economy may be roughly classified 
as follows : first, to illustrate and test conclusions not 
themselves resting on historical evidence ; secondly, to 
teach the limits of the actual applicability of economic 
doctrines ; thirdly, to afford a basis for the direct j 
attainment of economic truths of a theoretical character. ' 
It is to the last named function that reference is more 
particularly made when the application of the historical 
method to political economy is spoken of 



IX.] HISTORICAL ILLUSTRATIONS. 271 

§ 2. Economic theories illustrated hy history. — 
Even when the general line of argument adopted 
by the economist is of a deductive character, it is 
desirable that concrete historical illustrations should if 
possible be found. The kind of qualifications requisite 
in aj)plying theoretical conclusions to problems of real 
life will thus be made prominent ; and the student will 
at the same time be reminded that hypothesis and 
abstraction are employed but as means to an end, the 
ultimate aim of the science being the explanation 
and interpretation of the phenomena of the actual 
industrial world. Historical digressions may also assist 
the student in grasping the true import of a piece 
of reasoning that is in itself severely abstract. For 
example, the effect exerted on the general level of 
prices in a country by the quantity of money in 
circulation may be illustrated fi^om the debasement of 
the currency under Henry VIII. and Edward VI. and 
the great discoveries of the precious metals in America 
during the Tudor period, from the history of the 
assignats of the French Revolution, from the period of 
the Bank Restriction in England, and from the gold 
discoveries in Australia and California in the nineteenth 
century ^ 

^ Compare Nicholson, Money and Monetary Problems, pp. 58 ff. 
Cairnes shews in his Leading Principles of Political Economy, 
pp. 377 ff., how the ocQurrences following the gold discoveries in 



272 POLITICAL ECONOMY AND ECONOMIC HISTORY, [CHAP. 

It is to the economic history of the last hundred 
years that we most naturally turn for illustrations of 
current economic theories. Earlier economic history is, 
however, for some purposes available. Thus records of 
prices in the Middle Ages afford opportunities for 
illustrating the economist's general theory of values. 
For example, the movements in the price of grain 
resulting from the dearth of the years 1315, 1316, 
illustrate very forcibly the effect exerted on price by 
changes in supply. The price of wheat rose to more 
than three times what it was in ordinary years ; and the 
fact that the rise was proportionately greater than any 
that has been experienced in recent times verifies the 
theoretical conclusion that the more limited the range 
from which supplies are drawn, the greater will be the 
influence exerted on the market by variations in the 
seasons. • A comparison between medieval and modern 
prices illustrates, further, the influence of extended 
markets, and increased facilities of communication, in 
diminishing fluctuations and unifying prices throughout 
the country in ordinary years. 

An objection may perhaps be raised to drawing 
illustrations of modern economic theories from prices 
in the Middle Ages, on the ground that the influence 
of custom, and the operation of legal restrictions, 

Australia also serve to illustrate in a striking way tjip abstract theory 
of foreign trade. 



IX.] HISTORICAL ILLUSTRATIONS. 273 

must necessarily have obscured or even nullified the 
effects of supply and demand. It is true that very 
great caution is requisite in applying to earlier times 
theories that presuppose thoroughgoing competition; 
but even in the medieval industrial world competition 
was always at work in some form or other. Each case 
requires special investigation, and it is at any rate clear 
that law and custom did not exert an absolute and 
decisive influence on the price of grain at the period 
above referred to\ In so far as they were in some 
degree operative, the figures become in one respect 
still more striking, since they shew how changes in 
sup ply a re^capable of overriding both custom and legal 
enactments. 

As regards wages, one of the most obvious of 
early historical illustrations is afforded by the revolution 
in the history of labour in this country caused by the 
ravages of the Black Death in 1348, 1361, and 1369. 
Notwithstanding the differences of opinion as to the 
probable population of England at the beginning of 
the fourteenth century, it is generally agreed that not 
much less than half the people must have been swept 
off by the plague. An opportunity is thus afforded of 
studying on a large scale the effect on wages of a 
sudden diminution in the supply of labour, and also 

^ Compare Rogers, History of Agriculture and Prices in England, 
voL i. Preface; and vol. iv. p. 427. 

K. 18 



274 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP. 

the conditions under which a rise in wages, once 
obtained, is likely to be permanent. At first the whole 
industrial machine was thrown out of gear ; wages were 
doubled and, in some cases, even trebled. Even when 
things had somewhat settled down, nominal wages ^ 
appear to have risen on the average about fifty per 
cent. The whole of this rise was not maintained ; but 
still wages diiring the next hundred years remained 
from twenty-five to forty per cent, higher than they 
were before the plague. 

All this is in accordance with the general economic 
theory of wages. Especially it should be noticed that 
theory leads to the conclusion that if a general rise in 
wages is to be rendered permanent, it must be able to 
exert an influence upon the labourer's standard of com- 
fort before an increase in the population has had time 
to bring about a reaction. This conclusion is borne 
out by the permanent improvement in the position 
of the labouring classes that was effected in the case 
before us. It is true that after the plague had spent 

^ The plague was accompanied by a dearth, and this, together 
with the general dislocation of industry and the check given to the 
proper cultivation of the land, resulted in a considerable rise in the 
price of corn. Moreover a general slight rise in prices was in opera- 
tion, in consequence of successive depreciations of the coinage in 1346 
and 1351. The rise in real wages was, therefore, not quite so great as 
the rise in nominal wages would seem to indicate ; but no very great 
deduction need be made on this score, since the general increase in 
the money value of commodities was slight as compared witli the 
increase in wages. 



IX.] HISTOEICAL ILLUSTRATIONS. 275 

its force, population increased rapidly — a fact which 
may be noted as illustrating the Malthusian doctrine 
of population — but the diminution in the supply of 
labour was so great that the filling in of the gaps could 
not take place fast enough to prevent the rise in wages 
from permanently establishing itself 

Continual efforts were made by the legislature to 
restore wages to their old level ; but though the 
statutes passed with this object may have been 
partially successful in certain localities, they were 
in the main inoperative \ This failure of legislative 
enactments to override the ordinary action of supply 
and demand is very significant. It has been suggested 
that where economic conditions are changing very 

1 Professor Rogers suggests that even in those cases where the 
Statute of Labourers was nominally operative, it was in reality 
evaded. " The Statute of Labourers may indeed have produced some 
effect on farm labour. I seem to detect its operation from a fact 
which I have frequently noticed in the accounts after the Black 
Death. Entries of payments on certain rates are cancelled, and lower 
sums are substituted for them. Of course in the tables which I have 
constructed I have not taken the figures which have been cancelled, 
but those which are substituted. But I cannot help thinking that 
these changes point to evasions of the statute, and that perhaps the 
labourer was compensated to the full extent of the previous entry, 
but in some covert way, or by some means which would not come 
within the penalties of the statute. Thus there might be larger 
allowances at harvest-time, or the permission to make fuller use of 
common rights, or, as I have seen in the case of a shepherd, a licence 
to turn his sheep into his lord's pasture, or some analogous equivalent 
to a necessary but illegal money payment" (History of Agriculture 
and Prices in England, vol. i. p. 300). 

18—2 



276 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP. 

slowly, wages and prices may appear to be regulated 
by laws or customs entirely irrespective of competition, 
whereas in fact the laws or customs are being them- 
selves gradually modified from generation to generation, 
so that at any given time the rates which they sanction 
are not materially different from the normal rates that 
the free operation of supply and demand would itself 
have brought about ^ If there is any truth in this 
theory, it will explain how it was that although law 
and custom sometimes exerted considerable influence 
in medieval industrial economy, they failed to do so 
in the particular period succeeding the ravages of the 
Black Death. Here was a crisis in which economic 
conditions changed not gradually, but suddenly ; 
customary and legal rates of wages were unable to 
adapt themselves quietly and by degrees, but became 
strikingly divergent from competition wages ; and they 
had to give way accordingly. 

Whilst attention is called to the value of historical 
illustrations such as the above, attention may also be 
called to the weakness of historical records as com- 
pared with contemporary observations. It is almost 
impossible to be equally sure of the accuracy and 
adequacy of the available data ; and it is very easy 
to misinterpret them, particularly if they are of a 
statistical character. Many unrecorded and unsus- 
^ Compare Marshall, Present Position of Economics, pp. 48 to 50. 



IX.] HISTORICAL ILLUSTRATIONS. 277 

pected influences may also have been in operation, 
and undue importance may consequently be attached 
to those of which a record remains. This danger be- 
comes the greater, if we set out with the object of 
illustrating a foregone conclusion. 

There is a further difficulty sometimes involved m 
the use of historical illustrations. In order that they 
may not be cumbrous, there is danger of their becoming 
either inadequate as illustrations, or else inaccurate 
from the historical standpoint. Separated from their 
context, they are apt to lose a good deal of their force, 
while there is at the same time a certain liability 
to exaggeration. A theory may be satisfactorily tested 
and confirmed by an historical record taken in its 
entirety, and yet it may be difficult to point to any 
separate portion of the record as constituting by itself 
an adequate illustration or exemplification. Illustra- 
tions avowedly fictitious are preferable to historical 
illustrations that require to be doctored in order to 
serve their purpose ; and on the whole, while it is 
desirable to have recourse to historical illustrations 
wherever suitable ones present themselves, it is 
chimerical to expect that such illustrations can wholly 
supersede and replace illustrations of a hypothetical 
character. 

I 3. Economic theories criticized hy history. — It has 
been said that the true function of economic history in 



278 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP. 

relation to theoretical investigations is criticism ; and 
this is undoubtedly one of its most important functions. 
For history does not merely illustrate and confirm; it 
also brings mistakes to light, and shews where doctrines 
have been laid down without due qualification or limita- 
tion. The history of wages, for example, shews the 
error of the assumption that the standard of comfort of 
the labouring classes automatically determines the rate 
of wages, whilst it is itself unaffected by changes in 
that rate. 

In particular, economic history teaches the limits 
of the actual applicability of economic doctrines. It 
calls attention to the shifting character of economic 
conditions, and shews how, as these conditions vary, 
some at least of the principles by which economic 
phenomena are regulated vary also. The relativity of 
economic doctrines is discussed in some detail in a note 
at the conclusion of the present chapter ; and hence no 
more than a passing reference to the subject need be 
made at this stage. It will suffice to remark that the 
almost universal recognition of such relativity by recent 
economists, so far at any rate as concrete economic 
doctrines are concerned, may be regarded as one of the 
most striking and legitimate triumphs of the historical 
school. The question how far there remain economic 
principles for which universality may still be claimed 
will be considered later on. 



IX.] THE HISTORICAL METHOD. 279 

§ 4. Economic theories established by history. — The 
question next arises how far historical material may be 
of service for the discovery of economic uniformities, 
and not merely for the confirmation or criticism of 
theories arrived at in some other way. There are, 
without doubt, many problems which require for their 
solution a combination of deductive reasoning and 
historical investigation so to speak on equal terms; 
and there are other cases in which our main reliance 
has to be placed upon historical generalizations. 

The effects of machinery on wages, the occurrence 
of credit cycles, the extent of the evils resulting from 
bad currency regulations, the effects of gold discoveries 
or of a scarcity of gold on trade and industry, the work- 
ing of a system of progressive taxation, the economic 
consequences of different systems of poor relief, and 
of State interference of various kinds, may be given as 
instances where the economist is more or less directly 
dependent upon historical material. It is true that 
deduction from etementary principles of human nature 
also finds some place in the argument. Deduction at 
some stage or other of the reasoning is, indeed, in most 
cases essential to its cogency ; for the fallibility of purely 
empirical laws must constantly be borne in mind. Still 
instances of the above kind serve at once to invalidate 
the view that economic history never provides premisses 
for the economist or forms the basis of his doctrines. 



280 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP. 

For purposes of illustration the problem of the 
effects of machinery on wages may be considered in 
rather fuller detail. This problem really involves two 
questions, as is pointed out by Professor Nicholson in 
his essay on the Effects of Machinery on Wages : first, 
the immediate or closely proximate effects of the 
extended use of machinery — the characteristics, that 
is to say, of the state of transition ; and secondly, the 
general characteristics- — as affecting wage-receivers — 
of a system of industry in which much machinery is 
used, compared with one in which little machinery is 
used. 

In dealing with the first of these questions we may 
to a considerable extent employ deductive reasoning 
based on the general theory of distribution. We have 
to consider the increased efficiency of production due 
to the use of machinery, yielding a larger dividend for 
distribution ; the greater aid which capital is able to 
afford to labour, tending to raise the capitalist's share 
at the expense of the wage-receiver's'; the impetus 

^ This is a more satisfactory method of treatment than to argue 
from the increase of fixed at the expense of circulating capital. Con- 
sidering that the amount of capital at the disposal of an employer is 
not a definite sum, but may within certain limits be increased by the 
aid of credit, without diminishing the resources of other employers, it 
does not follow that an extended employment of machinery will neces- 
sarily diminish circulating capital. Assuming that the substitution 
of machine for hand labour lowers prices, demand will be stimulated; 
and it is possible that this may be the case to such an extent that in 



IX.] EFFECTS OF MACHINERY ON WAGES. 281 

given to the accumulation of capital ; the change in 
the kind of labour required, skilled labour of a given 
kind being superseded by unskilled labour or by skilled 
labour of another kind. These are the main factors to 
be taken into account, and we can argue from them 
deductively to the kind of effects that will be pro- 
duced. Of course the actual effects will vary with 
varying conditions ; but still arguing for the most 
part deductively, we can determine what are the most 
influential of these conditions : e.g., the continuity or 
want of continuity in the changes, and the time over 
which a given alteration is spread^; also, the adapt- 
ability of the labourers, depending mainly on their 
general intelligence and technical education. 

the pioductiou of the given commodity all the labour that was 
formerly employed may still be employed in addition to the machinery 
— the employers by means of credit discounting the future, so that 
although they have to purchase the machinery they can still advance 
as much in wages as before. This is the more likely to hold good if the 
machinery is introduced gradually, so as to allow demand to increase 
pari passu. So far as a different kind of labour is required, the old 
skilled workmen suffer because their jparticular skill is superseded, 
and not because there is less circulating capital with which to main- 
tain them. It is always true, however, that, ceteris paribus, the 
extended use of machinery increases the relative importance of 
capital in the work of production. 

1 Professor Nicholson, in the essay to which reference has been 
made above, formulates the following Law of Continuity: "A radical 
change made in the methods of invention will be gradually and con- 
tinuously adopted; and these radical changes, these discontinuous 
leaps, tend to give place to advances by small increments of inven- 
tion.^' A proposition of this kind can of course be established onlj' 
by direct historical evidence. 



282 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP. 

In all the above we may, in the manner indicated 
in the two preceding sections, appeal to the experience 
of the last hundred years to illustrate, confirm, or 
correct our conclusions ; still, so far, the use of history 
is mainly supplementary. We need more definitely to 
look to the past, when we turn to the second of the 
questions involved in the given problem, and seek to 
determine how wage-receivers are affected by the 
general characteristics of an age of machinery as 
compared with one of hand labour. In order to solve 
this problem, it is necessary, not only to consider the 
effects of cheapened production, but also to ask such 
questions as the following, — how far, and under what 
conditions, the use of machinery leads to the increased 
employment of women and children, to the concentra- 
tion of industry in large towns, to a widening of the 
gulf between employers and employed, and to longer 
hours of labour; how far it increases the monotony of 
work and dispenses with technical skill or the reverse^; 
how far it increases or diminishes the specialization of 
skill ; how far it increases or diminishes fluctuations 
in wages. Only to a limited extent do these questions 
admit of abstract treatment. At any rate so far as 
deductive reasoning is employed, it does but follow 
the suggestions of history, and starts from premisses 

1 Experience seems to shew that on the whole the use of machinery 
increases rather than diminishes the demand for skilled labour. 



IX.] EFFECTS OF MACHINERY ON WAGES. 283 

that are established historically. It is clear that the 
problem as a whole cannot be adequately dealt with 
except on an historical basis. 

At the same time, and in consequence of the 
method employed, great care is necessary if we are 
to avoid attributing in too high a degree to the use 
of machinery effects that are partly or wholly due 
to some other cause. There is need also to guard 
against the danger of unduly extending the range of 
our generalizations, in consequence of overlooking the 
way in which the problem is affected by the special 
conditions of particular trades. Inductions that may 
seem to be justified by the facts should as far as possible 
be deductively checked ; and it should in particular be 
remembered that the characteristics of machine-using 
epochs may vary at different stages, and that the use 
of very much machinery may not be related to that 
of much, as the use of much is to that of little, or 
the use of little to that of none. 

In more general problems relating to economic 
growth and progress the part played by abstract reason- 
ing is reduced to a minimum, and the economist's 
dependence upon historical generalizations is at a 

[maximum. Theories of economic growth and progress 

' . . . 

Imay, indeed, be said to constitute the philosophy of 

•economic history. For only by the direct comparison 

of successive stages of society can we reasonably 



284 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP. 

hope to discover the laws, in accordance with which 
economic states tend to succeed one another or to 
become changed in character \ 

There are in fact few departments of political or 
social science in which the a priori method avails less 
than in the study of economic development. J. S. Mill 
in his Political Economy, Book iv., discusses the influence 
of the progress of society on production and distribu- 
tion ; and his method is to begin by assuming certain 
factors unchanged, and then to deduce the consequences 
of changes in others. Some additional light is thrown 
on the general laws of rent, profit, and wages, under 
the hypothesis of effective competition ; but the dis- 
cussion yields very little in the way of a true theory 
of economic progress. It has been already pointed out 
that in studying the mode of development of economic 
conditions, the economist is more than ordinarily de- 
pendent upon general sociological knowledge ; and it 
may almost be regarded as a corollary that he is 
also more than ordinarily dependent upon historical 
investigation. The realistic and historical conceptions 
of political economy go hand in hand, and the spheres 

1 The historical comiDarison may, however, in some cases be use- 
fully supplemented by a contemporary study of oriental and savage 
countries, in the manner exemj)lified by the investigations of Sir Henry 
Maine. The study, for example, of village life in India and Ceylon 
gives insight into the nature and development of the agricultural 
communities of earlier times in Europe. 



IX.] IMPORTANCE OF THEORY TO THE HISTORIAN. 285 

within which they are specially appropriate may for 
the most part be identified. 

§ 5. Functions of economic theo7'y in historical 
investigations. — Turning to the other aspect of the 
relation between economic history and economic 
theory, we may pass on to enquire how far theoretical 
knowledge is of service in historical investigations. 
The first point to notice is that a knowledge of 
theory, i.e., of previously established general pro- 
positions relating to economic phenomena, teaches the 
historian what kinds of facts are likely to have an im- 
portant economic bearing. Even when we are engaged 
in the mere collection and registration of events, it is 
often advantageous, as Jevons has pointed out in the 
case of the physical observer, that our attention should 

■\ be guided by theoretical anticipations. Industrial 
phenomena are exceedingly complex, and unless we 

' know what special facts to look for, it is quite possible 
that some of the most vital circumstances may fail 
to attract our notice. Knowledge of cause and effect 
in the economic world is, accordingly, of assistance for 
discriminating between the facts to be specially noted 
and those that may without risk of error be disregarded. 

1 But while theoretical anticipations may serve a 

I very useful purpose, they may also be a serious source 
!of danger. It has often been pointed out how the 
mere narration of events is influenced by the narrator's 



286 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP. 

theoretical views. He is apt so to arrange and co- 
ordinate his facts — emphasizing some and slurring over 
others — that they cannot but suggest the conclusions 
he himself is inclined to draw from them. The history, 
for example, with which List commences his National 
Sy stein of Political Econoviy, though in many respects 
both sound and interesting, is more or less open to 
this criticism ; that is to say, it is history read in the 
light of a particular theory, which theory is afterwards 
to a considerable extent based on the history. 

If then a writer's theoretical views are likely to 
exert an influence upon his narration of facts, it is 
clearly of material importance that his preliminary 
study of theory should be careful and exact. It is also 
of importance that the theoretical position taken by 
the historian should not be disguised. As remarked by 
Professor Marshall, " the most reckless and treacherous 
of all theorists is he who professes to let facts and 
figures speak for themselves, who keeps in the back- 
ground the part he has played, perhaps unconsciously, 
in selecting and grouping them, and in suggesting the 
argument post Jioc ei'go propter hoc."^ 

If the historian is properly to fulfil his function, he 
must avowedly attempt to establish relations between 
phenomena, and trace causes and effects. But it is an | 
error to suppose that this is possible without the appli- 
^ Present Position of Economics, § 16. 



IX.] IMPORTANCE OF THEORY TO THE HISTORIAN. 287 

cation of general propositions previously established. 
Causes in history are not, as has been affirmed, "given 
to us in each case by direct evidence," if by this is 
meant that each set of events can be studied separately, 
and causal connexions assigned without the assistance 
either of deductive reasoning or comparison with other 
instances. All that is really given to us in each case 
by direct evidence is a complex sequence of events, 
in which the true bonds of causal connexion may be 
disguised in a thousand different ways, so that, far from 
being patent to every observer, they can be detected 
only by the trained student thoroughly equipped with 
scientific knowledge. It follows that some familiarity 
with economic theory is needed for the interpretation 
of industrial phenomena, such as it falls within the 
province of the historian to give. 

The above remarks apply with special force to 
the economic history of the last hundred years, both 
because the interactions between economic phenomena 
become more and more complicated as we approach 
recent times, and the interpretations of economic 
science are therefore the more indispensable ; and also 
because modern economic analysis has a more direct 
and immediate bearing on this period than on earlier 
periods. Still the application of what has just been 
said need not be limited to recent economic history, 
although it is true that as regards earlier times no 



288 POLITICAL ECONOMV AND ECONOMIC HISTORY. [CHAP. 

elaborate apparatus of theory is required. It may be 
added that the economic historian will be benefited 
by having received a scientific training in economic 
reasoning, even whcu-e there is little scope for the 
application of particular economic dogmas. Just as it 
is a function of history to criticize theory, so it may 
be regarded as a function of theory to criticize history. 
Theory often cannot tell definitely what actual results 
will follow from any given change ; but it can deter- 
mine the kind of effects that are probable or possible, 
and it can often particularise the conditions under 
which each will occur. It can, therefore, usefully 
criticize and test any given account of what actually 
took place. It is often competent to declare that 
a given effect cannot have been due to the assigned 
cause, or at least that this cannot have been the case 
under the stated conditions. 

There has been some dispute as to whether the 
study of economic history should precede that of 
economic theory, or vice versa ; it may also be argued, 
as a third alternative, that since their dependence upon 
one another is mutual, the study of the one and the 
other should be carried on more or less pari passu. 
It is diflicult to lay down a general rule applicable 
to all circumstances. But, on the whole, so far as 
elementary study is concerned, it seems best that some 
treatment of general economic science in its simplest 



IX.] INTERACTION OF FACTS AND IDEAS. 289 

and broadest outlines should come first. For unless the 
history is limited to an early period — say to that pre- 
ceding the seventeenth century — the history -essential 
to the illustration and due limitation of the general 
principles of economic reasoning can more easily and 
more safely be supplied incidentally, than can the 
theory essential to the right understanding of the 
history. 

§ 6. Economic history and the history of economic 
tlieories. — Distinct from the history of economic facts, 
but closely related thereto, is the history of ideas and 
theories concerning the facts. In the industrial sphere, 
as in other departments of human action, facts and ideas 
act and react upon one another, so that there results a 
complex bond of connexion between the historical 
succession of phenomena and the historical succession 
of theories. Economic theories may accordingly be 
considered, not merely in relation to their absolute 
truth or falsity, but also in relation to the economic 
facts that helped to produce them, and those that they 
themselves helped to produce. 

The theories of industry and commerce current at 
any period often throw light on the actual industrial 
facts of that period. From the study of the theories 
new points of view from which to regard the facts may 
be obtained, and fresh clues may be suggested leading 
to a more thorough knowledge of the actual course of 
K. 19 



290 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP. 

events. For this reason alone the economic historian 
would be led to examine the drift of economic opinion 
over the period of his investigations ^ 

Another reason why the historian of economic facts 
concerns himself with the history of economic theories 
is to be found in the direct influence which the opinions 
current at any period exert on subsequent events. 
The course of economic development is controlled and 
modified not only by actual legislation, but also by social 
institutions and current habits of thought ; and it is 
clear that all these are under the influence of theories 
and ideas. In early times, indeed, it is principally by 
their influence on actual phenomena that it becomes 
possible to trace the progress of ideas ; and up to a 
certain stage, the history of thought on economic 

' "Among the facts with which we are concerned," says Dr Cun- 
ningham in his Groioth of English Industry and Commerce during the 
Early and Middle Ages, "none are of greater importance than those 
which shew that certain ideas were lorevalent at a certain time, or 
were beginning to spread at a jJarticular date. It is only as we under- 
stand the way in wliicli men viewed the dealing and enterprise of 
their own time, and can thus enter into their schemes of advancement 
or their aims at progress, that the whole story may come to possess 
a living interest for us" (p. 17). Dr Cunningham adds that from the 
preambles of statutes and other documents and the economic litera- 
ture of each century, "we can generally learn what men thought and 
what they wished, so that we can better apprehend the meaning of 
what they did" (p. 21). It ought no doubt to he borne in mind that 
the preambles of statutes taken by themselves may sometimes be 
misleading. Their primary object being to provide justification for 
the statutes that follow, they cannot in all cases he I'egarded as 
unbiassed expressions of opinion. 



IX.] INTERACTION OF FACTS AND IDEAS. 291 

questions is almost necessarily merged in the history 
of the facts themselves. As we approach modern 
times, the theories begin to find more articulate and 
definite expression in literature, and we are able more 
and more clearly to distinguish between economic 
history and the history of political economy \ But 
it remains none the less true that the development 
of economic institutions and the course of economic 
legislation are always the outcome of the progress of 
thought concerning the phenomena of wealth. Even 
individual theorists may exert a striking influence on 
subsequent economic legislation. Adam Smith pre- 
pared the way for the triumphs of laisser faire which 
culminated in the repeal of the Corn Laws ; and the 
reform of the English Poor Law in 1834 was largely 
due to the direct and indirect influence exerted by the 
writings of Malthus. 

The reciprocal influence exerted by facts upon 
theories constitutes a further fundamental reason why 
the history of economic doctrines cannot be divorced 
from that of actual economic phenomena. The theories 
of any period are almost always based at least partly 

1 Blanqui fails to make the distinetiou sufficiently clear when he 
describes the history of political economy as "a summary of the ex- 
periments which have been made amongst civilised nations to improve 
the lot of mankind." Political economy, even if regarded as funda- 
mentally an art, is not properly to be identified with economic 
legislation. 

19—2 



292 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CHAP. 

upon assumptions that have a special application to 
the actual circumstances of that period. With every 
change in economic conditions fresh problems arise for 
solution, and the solutions offered cannot but be to 
some extent affected by the contemporary current of 
events. No writer can altogether free himself from 
the characteristic influences of his age and country; 
nor is it desirable that he should do so. It follows that 
the theories of the past cannot be properly understood, 
or their validity fairly estimated, unless they are taken 
in connexion with the actual phenomena that were at 
the time attracting attention, and helping to mould 
and colour men's views. 

As a simple example of the interaction of facts and 
ideas, the contempt expressed by Xenophon and other 
ancient writers towards the manual arts, with the 
one exception of agriculture, may be connected with 
the circumstance that in ancient communities manual 
labour was to a very great extent performed by slaves. 
At the same time, this contempt would naturally tend 
to perpetuate the state of things which up to a certain 
point accounted for it. 

Another example is to be found in the strong moral 
feeling that existed in the Middle Ages against the 
taking of interest. Under modern economic conditions 
individuals, as distinguished from nations, borrow 
mainly in order that they may make a profit. But in 



IX.] INTERACTION OF FACTS AND IDEAS. 298 

the eleventh and twelfth centuries the field for the 
investment of capital was limited, and for the most 
part recourse was had to the money lender only in 
circumstances of misfortune or special need. Hence 
the taking of interest naturally presented itself in a 
different aspect from that in which we are now wont 
to regard it. It should, however, be added that while 
the theory of the immorality of interest was relatively 
justified, many of the arguments adduced in support 
of the theory were as fallacious in reference to the 
economic conditions of the Middle Ages or any other 
period, as they would be in reference to existing 
economic conditions. The actual prohibitions of the 
Church against usurious practices were also in some 
cases apparently pushed beyond the point which the 
circumstances of the time are likely to have rendered 
expedient ; as, for instance, when wholesale merchants 
were forbidden to make a difference between cash 
prices and credit prices in their dealings with retail 
traders ; for it seems clear that in this case credit 
would usually be taken with the object of making 
a trade profit. As a matter of fact, however, the pro- 
hibitions were constantly evaded by means of ingenious 
legal fictions ; and it is probable that they were seldom 
really operative except in cases where they had some 
practical utility. 

The Mercantile System and the doctrines of the 



294 POLITICAL ECONOMY AND ECONOMIC HLSTOKY. [CHAP. 

Physiocrats have been clearly shewn by recent historians 
to have been the natural products of the times and 
circumstances in which they respectively arose. The 
need of reading particular economic works in the light 
of contemporary phenomena has also been copiously 
illustrated by reference to our three great English 
economists, Adam Smith, Malthus, and Kicardo. A 
word or two may be said here in regard to the last of 
the three only, whose doctrines, sometimes spoken of as 
pure abstractions, had in reality a special relation to the 
facts that came under his observation. 

As observed in a previous chapter, the main con- 
dition essential to the correct understanding of Ricardo 
is the precise determination of the assumptions upon 
which his reasoning proceeds. What these assumptions 
are, however, the reader is usually left to his own in- 
genuity to discover. Ricardo himself never explicitly 
formulated them — probably because they seemed to 
him in no sense arbitrary abstractions, but patent facts 
to which it was unnecessary specially to call attention. 
The reason of this is to be found in his personal 
circumstances, and in the general economic conditions 
of his time. His fundamental assumption is the 
operation of thoroughgoing uncontrolled competition ; 
and this may, in the first place, be connected with his 
position in the City, and on the Stock Exchange,- — a 
market that may be taken as a type of the theoretically 



IX.] RICARDO. 295 

perfect market, where competition is unceasing, and 
supply and demand all powerful. Ricardo's personal 
surroundings are, however, comparatively unimportant 
from our present point of view. What is really of 
importance is that he wrote at a moment when in 
the industrial world itself, so far as internal trade was 
concerned, the principle of competition was very active 
and self-assertive. Old statutes that sought to regulate 
industry were giving way before it. No Factory Acts 
had yet been passed. Trade combinations of workmen 
were still illegal. The industrial revolution of which 
Adam Smith hardly saw the commencement was in 
progress ; and in the general movement caused by it, 
the subtle hindrances to competition which were still 
in operation were the more easily overlooked. 

Ricardo has frequently been represented as laying 
down the " iron law " that wages cannot permanently 
rise above what is sufficient to provide the bare neces- 
saries of life. He explicitly recognises, however, that 
the "natural price of labour," even when estimated 
in food and necessaries, is not absolutely fixed and 
constant. " It varies," he says, " at different times in 
the same country, and very materially differs in different 
countries. It essentially depends on the habits and 
customs of the people."* At the same time, in the 
course of his reasonings, e.g., in his treatment of taxes 

^ Principles of Political Economy and Taxation (McCulloch's 
edition), p. 52. 



296 POLITICAL ECONOMY AND ECONOMIC HISTORY. [CH.IX. 

on raw produce, he constantly assumes that the working 
classes have so low a standard of" comfort, that an 
alteration in the price of necessaries must very quickly 
react upon the nominal rate of wages. This assumption 
may be taken in connexion with the deterioration in 
the state of the working classes at the beginning of the 
present century, — a deterioration due mainly to the 
industrial revolution and the demoralizing conditions 
under which poor relief was administered, supplemented 
by the Napoleonic wars and an extraordinary series of 
bad harvests. 

A minor assumption involved in many of Ricardo's 
reasonings is that all the agricultural produce consumed 
in a country is grown in the country itself. This 
again was a natural assumption to make at a time 
when, except in years of scarcity, the importation of 
wheat was virtually prohibited. Even had free trade 
seemed within the range of j)ractical politics, Ricardo 
could not have anticipated that the development of 
the wheat-producing capacities of North America and 
India, combined with the discovery of cheap and rapid 
means of transit, would ever bring about a condition 
of affairs in which England would import nearly twice 
the quantity of wheat and flour that she produced for 
herself Such a state of things, even if its possibility 
were contemplated, would seem so remote from facts 
as to make its economic consequences not worth dis- 
cussing. 



NOTES TO CHAPTER IX. 

A. On the Limits of the Validity of Economic 
Doctrines. 

§ 1. The relativity of concrete economic doctrines. — By 
some of the older economists, for example, Senior, political 
economy was regarded as a system of doctrines possessing 
universal validity. The science was declared to belong 
to no one nation and to no one country • wages, profits, and 
other economic phenomena were held to be governed by 
immutable laws comparable to the law of gravitation. 
De Quincey's eulogy of Ricardo may serve as an illus- 
tration. '• Previous writers," he says, " had been crushed 
and overlaid by the enormous weights of facts, details, 
and exceptions ; Mr Ricardo had deduced, a priori^ from 
the understanding itself, laws which first shot arrowy 
light into the dark chaos of materials, and had thus con- 
structed what hitherto was but a collection of tentative 
discussions into a science of regular proportions, now first 
standing upon an eternal basis." ^ 

This claim to offer something unconditional and true 
in the same way for all times, lands, and nationalities, 

1 Co;i/c.s.s/o;(.s of an Enrjlish Oinum-Eater (edition of 1856), p. 255. 



298 RELATIVITY OF ECONOMIC DOCTRINES. [CHAP. IX. 

is termed by Knies the ahsolutisia of theory^. He con- 
siders that it is countenanced as a tacit assumption by 
some writers who would not perhaps defend it on principle; 
and in opposition to it, he and other economists of the 
historical school affirm the relntivity of economic doctrines. 
On the ground that the economic phenomena of each age 
and each community are subject to special laws, an absolute 
system possessing universal validity is regarded as neces- 
sarily an impossibility; every people and every epoch are 
considered to have a political economy of their own more 
or less peculiar to themselves. The idea of the relativity 
of economic doctrines follows indeed immediately from the 
conception of economic life as exhibiting continuous organic 
growth, and this conception is itself the natural outcome of 
historical study ^. 

' While sometimes using the phrase coainopoVLtaniam of theory in 
much the same sense as absohitisin, Knies points out that it is not 
strictly speaking sufficiently broad in its signification. This phrase 
indicates the disregard of the special conditions given by territorial 
diii'erences and differences of nationality, but it fails to indicate the 
disregard of distinctions brought about by differences of time — 
whether in the case of one and the same people or of all peoples. To 
express this second element in absolutism of theory, the term pcr- 
2}etu(ilisin is sugj^ested. Die politiitche Oehmomie vom ffe»chichtlichen 
Standpunkte, 1883, p. 24. 

^ Richard Jones and Friedrich List are to be regarded as im- 
portant forerunners of the historical movement rather than as 
themselves typical representatives of the movement itself. What is 
most characteristic, however, in their teaching is the insistance upon 
relativity in two particular spheres. Jones specially insisted on the 
limited applicability of the Ricardian theory of rent as regards both 
place and time. A theory based on the assumptions of individual 
ownership and freedom of competition could not, he pointed out, 
apply to oriental states of society in which joint ownership is the 



NOTE A.] RELATIVITY OF ECONOMIC DOCTRINES. 299 

It is to be added that the affirmation of the relativity 
of economic doctrines is not confined to the historical 
school. Mr Bagehot, who was an economist of an essen- 
tially conservative type, expressly limits the science to 
a single kind of society, "a society of grown-up com- 
petitive commerce," such as existed in England in the 
nineteenth century. His object is, however, just the re- 
verse of that of the historical school. The aim of the 
historical school is to concentrate attention on economic 
history and on the study of economic development as 
opposed to the study of economic relations in a given 
society. Bagehot, on the other hand, seeks to concentrate 
attention on current economic phenomena, and to avoid the 
distraction that must result from turning aside to the super- 
ficially corresponding but yet essentially different phenomena 
of earlier epochs. 

In the discussion of the question here raised, the dis- 
tinction between abstract and concrete economics rises into 

rule and I'ents are regulated by custom, nor even to those instances 
nearer home iu which land is held on a customary tenure, as in the 
metayer system. Similarly, as regards limitation in time, he shewed 
that the Eicardian law could not hold good in a condition of affairs 
such as existed in medieval economy, where land was to a great 
extent held in common, and the relations between the owners and the 
tillers of the soil were not controlled by free competition. List based 
his defence of protective duties on the recognition of relativity in 
another sphere. He held that all civilised communities of the 
temperate zone pass through successive economic stages, and that for 
any given community at a given time the solution of the problem of 
protection versus free trade depends upon the stage of development 
that has been reached. The principle of relativity in the sphere of 
economics was expressed in a more general form by Eoschtr, and still 
more defiuitely by Knies, as indicated above (see also note B to this 
chapter, pages 317, 319). 



800 RELATIVITY OF ECONOMIC DOCTRINES. [CHAP. IX. 

importance. The former may at any rate be regarded as an 
instrument of universal application. It discusses principles 
that are universal in the sense of pervading all economic 
reasoning. To this point we shall return presently. Con- 
fining our attention in the meantime to concrete economic 
doctrines, it ma}' be said that their relativity follows im- 
mediately from the realistic conception of this portion of 
the science adopted in an earlier chapter. It is as true of 
economic conditions, as of social conditions in general, that 
they are ever subject to modification. They vary with the 
legal form of society, and with national character and in- 
stitutions. 
•yC« Even where the forces in operation are the same, the 
f relative strength that should be assigned to each may 
vary indefinitely. Law, custom, competition, combination, 
are agents in determining the distribution and exchange of 
wealth, no one of wliich is probably at any time altogether 
inoperative'. But the extent of their influence, and the 

' Just as ill modern industrial societies, where competition is tlie 
dominant force, some vahies are nevertlieless regulated by law or 
custom {e.g., parliamentary railway fares, lawyers' fees), so in more 
primitive societies, where custom is the most powerful intluence, com- 
petitive prices are not altogether unknown. Sir Henry Maine in 
his Vilkiiie Coinrnnnities, Lecture vi, gives several instances of com- 
petitive prices existing side by side with customary prices. There are 
cases, for example, where members of the same group never think 
of trading together upon commercial principles, but where dealings 
between members of different groups are entirely unshackled by 
customary rule. There are also cases where "natives of India will 
pay willingly a competition price for one article, when they would 
think it unjust to be asked more than a customary price for another. 
A man who will pay the price of the day for corn collected from all 
parts of India, or for cotton-cloth from England, will complain if he 
is asked an unaccustomed price for a shoe." 



NOTE A,] RELATIVITY OF ECONOMIC DOCTRINES. 301 

manner in which it is exerted, are constantly varying; 
and such variations are always of importance as affecting 
the relevancy of economic doctrines in relation to actual 
economic phenomena. 

JSJ'ot much needs to be said in illustration of the above 
statements. It has become a commonplace that many 
modern economic theories have little or no direct appli- 
cation to medieval Europe. The contrasts presented by 
medieval and modern societies, and by contemporary' 
Oriental and European societies, considered in their eco- 
nomic aspects, are indeed such as can hardly be overlooked \ 
As regards the former of these contrasts, Cliffe Leslie puts 
the case very forcibly in brief compass, — "The structure and 
phenomena of medieval society in Germany, as elsewhere, 
were far from suggesting an economic theory based on in- 
dividual interest and exchange. Common property in land, 
common rights over land held in severalty; scanty wealth 
of any kind, and no inconsiderable part of it in mortmain, 
or otherwise intransferable ; labour almost as immovable 
as the soil ; pi'oduction mainly for home consumption, not 
for the market ; the division of labour in its infancj', and 
little circulation of money ; the family, the commune, the 
corporation, the class, not individuals, the component 
units of society : such are some of the leading features 
of medieval economy."^ The Ricardian law of rent, in 

1 Less striking contrasts, but contrasts that ought not to be 
neglected, are observable when we consider different modern com- 
munities of the European type in respect of particular economic 
phenomena, such as the tenure of land, the mobility of labour, and 
so forth. On this point see also pp. 309, 10. 

- Essays in Political and Moral PJdlosopliy, 1888, p. 84. 



302 RELATIVITY OF ECONOMIC DOCTRINES. [CHAP. IX. 

the ordinary form in which it is stated, may be taken as 
a special example. E-\ery economist recognises that this 
law does not apply uni\ei'sally, although the physical fact 
of different returns to different doses of capital may 
remain'. 

It must not, indeed, be supposed that current economic 
theories are wholly inapplicable to earlier periods of history. 
Instances of their applicability have been given in the pre- 
ceding chapter. Dr Cunningham draws a clear distinction 
in this respect between market prices and rents. " Many 
of the phenomena of medieval industrial life," he remarks, 
"were governed by conditions precisely' similar to those 
which operate now ; competition was quite as real, though 
there was more ' friction,' and its action was less obvious. 
Market prices of all kinds, such as the price of wool or of 
herrings, were determined by supply and demand as truly 
as now, and none of the frequent efforts to interpose 
barriers could alter the forces at work, though they might 
affect the rate of their operation. But with rents it was 
different ; free competition and market rates did not con- 
trol agricultural operations as they do now, and the theory 
which rightly assumes them for the present day does not 
serve to explain the variations of medieval rents." 

The following statement may be quoted as an example 
of the tendency to over-estimate rather than to under- 
estimate the relativity of economic doctrines. "The middle 
ages," says Dr Seligman, "were a period of customary, not 
of competitive prices ; and the idea of permitting agreements 
to be decided by the individual preferences of vendor or 

^ Compare pp. 312, 13. 



NOTE A.] RELATIVITY OF ECONOMIC DOCTRINES. 303 

purchaser was absolutely foreign to the jurisprudence of 
th(^ times. The 'higgling of the market' was an impossi- 
bility simply because the laws of tlie market were not left 
to the free arbitrament of the contracting parties. It 
would have seemed preposterous for the producer to ask as 
much as he could get, or, on the contrary, to demand less 
than his neighbour, and thus undersell him.'" Professor 
Rogers has, however, shewn that " producers were very 
acute during the middle ages, and for the matter of that, 
buyers, too, in doling out their supplies to the market, or in 
making purchases, according to their interpretation of the 
amount in hand or available for sale. The most critical 
sales of the year were those effected in early summer, when 
the amount of the last year's produce was known prett}^ 
correctly, and the prospects of the ensuing harvest could be 
fairly guessed."'-^ This brings out a point that is of consider- 
able importance in the operation of the law of supply and 
demand, namely, the manner in which estimates of future 
supply influence the amounts immediately demanded by 
purchasers and those immediately offered for sale by 
vendors. Take, again, the following reference to the price 
of iron in the fourteenth century, as a simple instance of 
the effect of demand on price. "A very dry summer caused 
much wear and tear of implements, and consequently an 
increased demand and a higher price ; so that the bailiff's 
accounts frequently mention the ' dearness of iron on 
account of drought.' "^ 

^ Science Economic Discussion, p. 6. 
'^ Six Centuries of Work and Wages, p. 144. 

'' Ashley, Economic History, vol. i., p. 36. Professor Ashley in 
a lecture on the Study of Economic History [Surveys Historic and 



304 RELATIVITY OF ECONOMIC DOCTRINES. [CHAP. IX. 

Again in regard to contemporary economic phenomena 
of a different type from our own, although prices may 
appear to be wholly under the influence of custom, com- 
petition may still operate in a disguised form — a change in 
the quality of the goods sold taking the place of a change 
in price. Sir Henry Maine indicates that in the more 
retired villages in the East, where the artificer who plies 
an ancient trade still sells his wares for the customary 
prices, he is prepared to change their quality under con- 
ditions which in the West would lead to a change in price'. 

Still, whilst it is an exaggeration to regard doctrines 
based on the hypothesis of competition as wholly inap- 
jjlicable to the past or to oriental societies at the present 
time, it is strictly true that such doctrines can never be 
safely applied witliout special enquiry and the most careful 
investigation of economic conditions. 

And the progress of society does not merely affect the 
solution of old economic problems ; it also gives rise to new 
ones. There are many doctrines relating to complex pro- 
blems of money, credit, international trade, and the like, 
that can apply only to advanced economic societies. In 
relation to earlier states of society these doctrines are not 
so much false as irrelevant. 

Economic, p. 12) observes in criticism of the use here made of this 
quotation, " Surely the power of tracing so obvious a connexion 
between phenomena demands nothing more than plain common 
sense." Granted that this is so, however, it seems in no way to affect 
the appropriateness of tlie instance in relation to the particular point 
at issue. The question raised in the text does not turn on the nature 
of the proof of the law connecting changes in price with changes in 
demand, but simply on the range of the application of the law. 
1 Village Comvmnities, pp. 190, 1. 



NOTE A.] RELATIVITY OF ECONOMIC DOCTRINES. 305 

The above remarks relate to economic theorems. The 
recognition of the relativity of economic maxims is even 
more imperative; and, as suggested in an earlier chapter, 
unless we carefully distinguish the theorems from the 
maxims, v^e shall naturally be led to exaggerate the re- 
lativity of the former. In theoretical investigations hypo- 
thesis and abstraction are often indispensable ; but when 
we apply our theory with the object of laying down rules of 
practice, it is desirable to have recourse to hypothesis and 
abstraction but sparingly. It is indeed doubtful whether, 
in the examination and criticism of particular economic 
institutions and policies, we can advantageously carry uur 
abstraction even to the stage of neglecting social and politi- 
cal considerations of an altogether non-economic character. 
But the bearing of such considerations, even more than of 
purely economic considerations, will vary with the circum- 
stances of different nations and different ages. Hence a 
given economic policy can in general be recommended only 
for nations having particular social and economic sur- 
roundings, and having reached a certain stage of economic 
development. It may be possible to formulate as having 
universal validity certain negative precepts, namely, that 
certain lines of action cannot in any circumstances be 
advisable ; but on the whole the principle of relativity 
may be accepted with little qualification so far as economic 
precepts are concerned. 

Legislation directed against speculative dealings in any 
commodity may be mentioned as a simple instance of the 
i-elativity of economic politics. The expediency of such 
legislation depends largely on the extent to which the 
economic conditions of place or time i"ender it possible for 
K. 2Q 



306 RELATIVITY OF ECONOMIC DOCTRINES. [CHAP. IX, 

individuals or combinations to succeed by speculative pur- 
chases in gaining an effective control over the whole supply 
of the commodity'. Speaking more generally, we may say 
that the less favourable the conditions to the maintenance 
of thoroughly effective competition, the more expedient 
become legal interferences with competition. Thus the 
justification of the Assize of Bread and Ale, and other 
similar medieval laws regulating prices, is to be found in 
the probable failure of competition in the case of retail 
exchanges. The aim was merely to ensure — -what really 
effective' competition would of itself have brought about — a 
correspondence between retail prices and variations in the 
price of the raw material. 

§ 2. Undesir ability of limiting political economij to the 
theory of modern commerce. — The recognition of the re- 
lativity of economic doctrines led Mr Bagehot, not to the 
adoption of the historical method in any form, but to the 
limitation of political economy to "the theory of commerce, 
as commerce tends more and more to be when capital 
increases and competition grows." Mill is criticized for 
"having widened the old political economy either too much 
or not enough." " If it be," says Bagehot, " as 1 hold, a 
theory proved of, and applicable to, particular societies 
only, much of what is contained in Mr Mill's work should 
not be there ; if it is, on the contrary, a theory holding 
good for all societies, so far as they are concerned with 
wealth, much more ought to be there, and much which is 
there should be guarded and limited."^ 

A good many reasons may be urged against adopting 

^ ComiDare Ashley, Economic History, vol. i., p. 187. 
^ Economic Studies, pp. 19, 20. 



NOTE A.] SPHERE OF POLITICAL ECONOMY. 307 

a definite limitation of political economy such as is here 
indicated. It is true that the modern economist will 
formulate principally a doctrine that applies to the 
economic world in which he finds himself ; he will fre- 
quently select assumptions that hold good only in such a 
world ; and wherever this is the case, it is essential that it 
should be carefully borne in mind. But we need not work 
with one and the same set of assumptions throughout. 
We may investigate the economic phenomena of more 
societies than one ; and we shall find that the application 
of our doctrines has to be narrowed or may be widened 
according to circumstances. While some of our conclusions 
may be true only of the more advanced countries of 
the world, and that only in the present stage of their 
development, others may have a far more extensive ap- 
plication, or may at any rate require to be only slightly 
modified in order that this may be the case. It is probably 
true that the law of supply and demand directly applies 
to some classes of exchanges in almost every state of 
society; and there are many other laws to which a very 
wide range of application may be given, e.g., Gresham's 
law — that bad money drives out good money. Moreover, 
the wider the range of our investigations the more complete 
and serviceable is likely to be our knowledge of the present'. 
Mr Bagehot speaks of the periods preceding the modern 
commercial era as pre-econoviic^ ; but this conception is 

1 It has been shewn in the preceding chapter that certain theories 
of prices and wages may be very well exemplified by statistics of the 
fourteenth and fifteenth centuries. But the England of that period 
was certainly not an example of a modern industrial society. 

2 Economic Studies, p. 65. 

20—2 



808 SPHERE OF rOLITICAL ECONOMY. [CHAP. IX. 

open to criticism. Granted that in ancient Greece and 
Egypt, in feudal Europe, in the village communities of 
India and Ceylon which still survive, the phenomena of 
wealth are found to be in many vital respects different 
from those of modern Europe, and to be partially at least 
governed by different laws; still they remain economic 
phenomena, and — except in so far as adequate data are 
unattainable — it is not beyond our power to investigate 
them. We are compelled to recognise eras of varying 
economic types, and the existence of primitive societies 
in which industrial organization is but rudimentary; but 
until we find an age or a society in which exchanges — 
even in a disguised form — are unknown, and appropriated 
wealth does not exist, we have not in a strict sense reached 
the pre-economic. 

We are told, for instance, how in the village com- 
munity of Ceylon the craftsman " exchanges the results of 
his handiwork and specially acquired skill against a share 
of the produce on the threshing-floor of his neighbours."' 
The exchange takes place without the intervention of any 
medium of exchange, and is regulated by custom, not by 
competition. Nevertheless it is an economic phenomenon 
of a kind that the economist ought not to neglect. Sir 
Henry Maine has pointed out, further, how the importance 
of studying the economic phenomena of the East is in- 
creased by the fact that in the midst of striking diversity, 
they nevertheless do resemble in many respects the eco- 
nomic phenomena of the West. " If Englishmen settled 
in India," he remarks, "had found there kinds of property 

^ Sir J. B. Phear, The Aryan Village in India and Ceylon, p. xvi. 



NOTE A.] SPHERE OF PCLITICAL ECONOMY. 309 

such as might be attributed to Utopia or Atlantis, if they 
had come upon actual community of goods, or an exact 
equality of all fortunes, or on an exclusive ownership of 
all things by the State, their descriptions would at most 
deserve a languid curiosity. But what they found was 
very like, and yet appreciably unlike, what they had left at 
home. The general aspect of this part of social mechanism 
was the same. There was property, great and small, in 
land and moveables ; there were rent, profits, exchange, 
competition ; all the familiar economical conceptions. Yet 
scarcely one of them exactly corresponded to its nearest 
"Western counterpart. There was ownership, but joint 
ownership by bodies of men was the rule, several owner- 
ships by individuals was the exception. There was the 
rent of lands, but it had to be reconciled with the nearly 
universal prevalence of fixity of tenure and the consequent 
absence of any market standai^d. There was a rate of 
profit, but it was most curiously under the influence of 
custom. Thei'e was competition, but trade was conducted 
by large bodies of kinsmen who did not compete together; 
it was one large aggregate association which competed with 
another.'" 

A further reason for not accepting Bagehot's conception 
of political economy is that it is impossible so to limit the 
science that all its concrete doctrines shall be relative to 
precisely the same condition of society. It cannot be said 
of the modern commercial world itself that it is a fixed and 
stationary state of society, subject no longer to variation 
or modification. The economic condition of the United 

1 Tlie Effects of Observation of India on Modern European Thought, 
Eede Lecture, 1875. 



310 SPHERE OF POLITIO'-.L ECONOMY. [CHAP. IX. 

States to-day is not tlie same as that of England — the 
postulate, for instance, of the free mobility of labour from 
place to place and from occupation to occupation is pro- 
bably more fully realised in the former country than in the 
latter; nor is the economic condition of England— in 
regard, for instance, to the tenure of land — the same as 
that of France. Still more striking is the contrast be- 
tween the economic Kngland of the twentieth century 
and the economic England of Adam Smith's time. Even 
in the commercial era, therefore, it is necessary carefully 
to examine the applicability of our premisses, and to 
recognise still a I'elativity. As a matter of fact, there 
is comparatively little risk of our misapplying modern 
economic theories to savage or oriental states of society. 
It is when we come nearer home that the danger of the 
undue extension of economic doctrines is the greater ; and 
that danger is at least not diminished by Bagehot's con- 
ception of a transcendently economic era, in regard to 
which it may be supposed that the application of economic 
theories is absolute, needing no qualification. 

§ 3. In tvliat sense universality may he claiined for the 
principles of abstract economics. — The relativity of concrete 
economic doctrines does not establish the impossibility of 
an abstract theory having a certain character of uni- 
versality; and it remains to be indicated in what sense 
universality may still be claimed for the principles of 
abstract economics. 

In the first place, abstract economics analyses the 
fundamental conceptions of the science, such as utility, 
wealth, value, nieasure of value, capital, and the like. It 
has been pointed out in an earlier chapter that even the 



NOTE A.] UNIVERSALITY OF ECONOMIC DOCTRINES. 311 

defiuitions of political economy may sometimes be relative 
or progressive. But in the analysis of such conceptions as 
the above it is not too much to look forward ultimately to 
a certain finality. It has been already observed that if 
the conceptions take on a somewhat different character in 
different connexions, we shall at least find something that 
is generic and universal in each one of them ; and a 
consideration of them in their general character will 
be a valuable preliminary to more concrete economic 
enquiries. 

Abstract economics next proceeds to discuss certain 
fundamental principles that are universal in the sense of 
pervading all economic reasonings. One of these principles 
is the law of the variation of utility, which is the key-note 
of Jevons's principal additions to the science. This prin- 
ciple applies not only to material commodities determining 
the law of demand for them, but also to services ; and 
hence it is of the greatest importance in the whole theory 
of distribution. Thus, other things being equal, the aid 
which a dose of capital of a given description can render to 
the labour with which it is co-operating diminishes as the 
number of doses is increased ; similarly, other things being- 
equal, tlie aid which a unit of labour of a given kind can 
afford to capital, and to the other kinds of labour which it 
is assisting, diminishes as the number of units is increased. 
The truth of this elementary principle is quite independent 
of social institutions and economic habits, though the 
results which it actually brings about may vary consider- 
ably. Another principle of a similar character is that, 
other things being equal, a greater gain is preferred to a 
smaller; or, as we may put it, every man so far as 



312 UNIVERSALITY OF ECONOMIC DOCTRINES. [CHAP. IX. 

he is free to choose will choose the greater apparent 
good'. 

On the basis of its analysis of fundamental conceptions, 
assisted by principles such as the above, abstract economics 
is enabled to draw certain negative or formal inferences 
which possess the character of universality. As, for 
instance, that a general rise in values is impossible; that 
if two kinds of commodities have the same law of utility, 
that which is the rarer will be the more valuable ; that 
of different methods of production which can be used for 
obtaining a given result, the one that can do the work the 
most cheaply will in time supersede the others" ; that 
facilities of transport tend to level values in different 
places, while facilities of preservation tend to level values 
at different times. In the same category may be placed 
such propositions as that no commodity or service can 
serve as a universal measure of value between different 
times and places, and that general over-production in a 
literal sense is impossible. 

We have already spoken of the relativity of the 
Ricardian law of rent as ordinarily stated. But compare 
with this the principle of economic rent in its most 
abstract and generalised form. The Ricardian law, so far 

1 It is of principles such as these that Jevous is probably thinking 
when he remarks that "the first principles of political economy are 
so widely true and applicable, that they may be considered universally 
true as regards human nature" {T]ie Future of Political Economy, 
Fortnightly Review, vol. xxvi., p. 624); and again, "the theory of 
the science consists of those general laws which are so simple in 
nature, and so deeply grounded in the constitution of man and the 
outer world, that they remain the same throughout all those ages 
which are within our consideration" (p. 625). 

- This is one form of the important Law of Substitution. 



NOTE A.] UNIVERSALITY OF ECONOMIC DOCTRINES. 313 

as it cTaims to determine the actual payments made by 
the cultivatoi's of the soil, is a relative doctrine, that is 
to say, it is based on assumptions, which, as regards both 
time and place, hold good over a limited range only. The 
theory of economic rent in its most generalised form, 
however, merely affirms that where different portions of 
the total anjount of any commodity of uniform quality 
supplied to the same market are produced at different 
costs, those portions which are raised at the smaller costs 
will yield a differential profit ; and there is now no similar 
limitation to its applicability. This principle may even 
be said to hold good in a socialistic community, for the 
differential profit does not cease to exist by being ignored 
or by being municipalised or nationalised. 

In this way may be built up a system of general 
theorems relating to economic phenomena which, with 
due modifications, are applicable under widely different 
conditions. It has to be admitted that the body of 
doctrine thus built up is mainly hypothetical in character; 
that is, it will not by itself enable us to lay down definitely 
the laws according to which wealth is distributed and 
exchanged in any given society. In order to determine 
the latter, we have further to take into account the special 
conditions under which the general principles operate ; and 
such conditions are indefinitely variable. But what is 
here maintained is that the abstract theory is invaluable 
as a preliminary study. The principles involved and the 
modes of investigation employed have a significance and 
importance which it would be misleading to call merely 
relative ; and the economist who would deal with the more 
concrete problems of any particular age or state of society 



314 UNIVERSALITY OF ECONOMIC DOCTRINES. [CHAP. IX. 

cannot afford to neglect them. Thus, as we have already 
seen, there is a good deal of abstract reasoning in regard 
to the laws of supply and demand that has a very wide 
application indeed. These laws work themselves out 
differently under different conditions, and in particular 
there are differences in the rapidity with which they 
operate. Their operation may, however, be detected 
beneath the surface even in states of society where custom 
exerts the most powerful sway. And this would in all 
probability be overlooked were not our attention turned in 
the right direction by the method of analysis afforded by 
abstract economics. 



B. On the Conception of Political Economy as 
A distinctively Historical Science. 

Tt lias been shewn in the preceding chapter that the 
study of economic history plays a distinct and characteristic 
part in the building up and perfecting of political economy. 
There are many problems belonging to economic science 
whose solution must necessarily remain incomplete, apart 
from the aid afforded by historical research ; and the 
historical method is, therefore, rightly included amongst 
the methods to which the economist ought to have recourse. 
Nevertheless economics is not to be considered, as some 
maintain, an essentially historical science. 

This view is opposed to the doctrines of those more 
advanced members of the historical school who maintain 
that their method should supersede, and not merely supple- 
ment, other methods, and who seek to bring about thereby 



NOTE B.] HISTORICAL CONCEPTION OF ECONOMICS. 315 

a complete transformation of political economy. A claim 
of this kind is sometimes put forth explicitly. Thus ClifFe 
Leslie treats the deductive and historical methods as neces- 
sarily antagonistic, and rejects the former on the ground 
that its professed solutions of economic problems are illusory 
and false. It yields, he says, " no explanation of the laws 
determining either the nature, the amount, or the dis- 
tribution of wealth"; the philosophical method of political 
economy must, on the other hand, " be historical, and must 
trace the connexion between the economical and the other 
phases of national history."^ From a similar point of view, 
Dr Ingram blames Jevons for seeking to "preserve the 
a prior-i mode of proceeding alongside of, and concurrently 
with, the historical." He adds that "the two methods 
will doubtless for a time coexist, but the historical will 
inevitably supplant its rival."" 

Other writers, while professing that they do not entirely 
reject the deductive method, still set it contemptuously on 
one side as having already done all it can do, and played to 
the full its unimportant part in economic investigations. 
The necessity for a completely new departure is no less 
strenuously insisted upon. Even if the doctriYies reached 
by the methods of the older economists possess a relative 
truth, they are, it is said, of little importance; and 
political economy can do fruitful work in the future only 
by taking on a new form and becoming a distinctively 
historical science. The abstract method, says Professor 
Schmoller, has degenerated into intellectual consumption ; 

^ Essays in Political and Moral Philosoj^Jty, 1888, p. 189. 
■^ History of Political Economy, pp. 232, 3. 



310 HISTORICAL CONCEPTION OF ECONOMICS. [CHAP. IX. 

the spring of its vitality is dried up. A necessary revolution 
is in progress, whereby things are viewed from a totally 
different side — the historical. " In the future a new epoch 
will come for political economy, but only by giving value 
to the whole historical and statistical material which now 
exists, not by the further distillation of the already-a- 
hundred-times-distilled abstractions of the old dogmatism.'" 

The extreme " historismus " of which we are now 
speaking is characteristic only of the more advanced wing 
of tlie historical school, and not of Roscher, who is usually 
regarded as its chief founder, or of its more moderate 
representatives such as Wagner, whose treatment of the 
whole subject of economic method is admirable". 

Roscher, for instance, insists on the necessity of taking 

^ Zitr Litteraturficscliichte der Stunts- unci Sozialwissenschaften, 
p. 279. 

- See previous references to Wagner on pi^. 27, 8, and elsewhere. 
Wagner is spoken of by a writer in the lievue de Belc/ique (15 Ajsril 
1889) as un deductif modere, and as such is contrasted with Schuioller, 
who is un histnrique avcDice, with Monger, who is wn deductif 
intransigeant, and with Brentano, who is un historique modere. He 
explicitly inchades himself, however, amongst the representatives of 
the historical school of national economy in Germany ; and the fact 
that he is nef^ertheless described as un deductif inod6re may be con- 
sidered a tribute to the judiciousness with which he combines rival 
methods, and holds the balance between them. A moderate writer 
whose attitude is one of compromise is likely to be regarded as belong- 
ing to the one hostile camp or the other according to our own point 
of view. There are in fact all shades of opinion among recent 
German economists who more or less sympathize with the historical 
reaction, and this makes it very difficult broadly to describe their 
position without doing injustice to some. Even individual writers 
take up sometimes a more and sometimes a less extreme position. In 
the present note we are purposely dealing only with the more extreme 
views of the more extreme writers. 



NOTE B.] HISTORICAL CONCEPTION OF ECONOMICS. 317 

into consideration the varying character of economic habits 
and conditions, and attacks especially the fallacy of 
criticizing economic institutions, regardless of a people's 
history and the stage of social and industrial development 
to which they have attained. But he neither effects nor 
seeks to effect a complete transformation of political 
economy. Whilst his chief treatise on the subject abounds 
in historical and statistical illustrations, and is full of 
information about the history of economic principles, the 
doctrines taught in it follow in the main the orthodox 
lines both in substance and in manner of exposition. He 
even "has no doubt that the future will accord both to 
Ricardo and Malthus their full meed of honour as political 
economists and discoverers of the first rank.'" This very 
moderation of Roscher is, however, by some of his more 
advanced followers made a subject of reproach. The 
dogmatic and the historical matter in his Principles are 
said to be juxtaposed rather than vitally combined ; and 
he is charged with not having been sufficiently under the 
influence of the method which he himself was one of the 
first to characterize^. 

In criticizing the conception of political economy as a 
distinctively historical science the main difficulty consists 
in understanding what the conception really amounts to. 

^ Principles of Political Economy, Preface. 

2 Knies deplores the fact that Eoscher did not make stronger 
steps forward after having taken up a position that promised so much. 
He considers that the historical method, as exemplified by Eoscher's 
actual treatment, becomes historical description enlarged rather than 
political economy set right. Die politische Oekonomie vom geschicht- 
lichen Standpunkte, 1883, p. 35. 



318 HISTORICAL CONCEPTION OF ECONOMICS. [CHAP. IX. 

It is far from being easy to gain a clear idea of the form to 
be assumed by economics when its " transformation " has 
been effected. Much that is said by the historical school 
consists of mere negative criticism ; and on the positive 
side, there is often wanting an adequate discrimination 
between what really belongs to economic science, and what 
is no more than economic history pure and simple'. 

1 Cliffe Leslie enumerates a number of problems which he asserts 
are left entirely unsolved by the deductive method ; but most of these 
problems will be found to be of a purely historical character. On the 
other hand, when he comes to deal with theoretical questions, he 
himself constantly implies or presupposes the use of a deductive and 
a priori method of reasoning on fundamental jjoiuts. For instance, 
"Only high profit can permanently support high interest, and low 
profit can afford only a low recompense to the lender of capital. The 
rate of profit determines in general both the maximum and the 
minimum of interest; the maximum must be below it, or the borrower 
would make nothing, and the minimum must not be so low as to 
drive the owners of capital to employ it themselves, instead of lending 
it, or to spend it" (Essays, p. 255). Again, "A falling-off in the 
foreign demand for British produce, such as is sometimes argued from 
the small proportion of exports, would have the opposite effect of 
diminishing the proportion of imports, by altering the equation of 
international demand to the disadvantage of Great Britain. A 
diminution of exports might result from hostile tariffs, but imports 
would fall off more. A good market abroad for our exports raises 
their value measured in foreign commodities, and swells the amount 
of goods given for them ; while a declining demand in foreign countries 
would compel us to give more for our imports ; the ratio of exports 
would increase, exporters would sell at ever-increasing disadvantage 
and diminishing profits" (p. 257). The doctrine here laid down 
appears to be based on Mill's theory of international values, which 
represents the deductive method in a somewhat high stage of develop- 
ment. Other typical instances, in which Cliffe Leslie employs the 
deductive method after the fashion of ordinary deductive economists, 
are cited by Professor Sidgwick in an article on Economic Method in 
the Fortnightly Revieiv for Februar}', 1879, pp. 304, 5. Compare also 



NOTE B.] HISTORICAL CONCEPTION OF ECONOMICS. 319 

According to Knies, the historical conception of political 
economy is based on the ideas of economic evolution and 
the relativity of economic doctrines. Economic institutions 
and economic theories are products of historical develop- 
ment. No given economic system can be final. It is 
itself the result of special conditions of time, place, and 
nationality ; and as these vary, it will be subjected to 
progressive modifications. Every nation, therefore, and 
every age has a political economy of its own. Hence 
follows the denial that there are any absolute or universal 
economic laws. Every economic principle is relative to the 
particular phase of development to which a nation has at 
any given time attained. And so political economy re- 
solves itself into a description of the various stages of 
industrial evolution, and the principles appropriate to 
each in turn'. 

The relativity of economic doctrines has been discussed 
in the preceding note ; and only two remarks need be 

— witli reference to" other economists of the historical school — Sidg- 
wick, Scope and Method of Political Economy, pp. 35, 6. 

^ "In opposition to the absolutism of theory, the historical con- 
ception of political economy rests upon the fundamental principle 
that the theory of political economy, in whatever form we find it, is — 
hke economic life itself —a product of historical development; that 
it grows and develops — in living connexion with the whole social 
organism — out of conditions of time, space, and nationality ; that 
it has the source of its arguments in historical life, and ought to give 
to its results the character of historical solutions ; that the laws of 
political economy should not be set forth otherwise than as historical 
explanations and progressive manifestations of the truth; that they 
represent at each stage the generalizations of truths known up to 
a certain point of development, and neither in substance nor in form 
can be declared unconditionally complete ; and that the absolutism of 
theory — even when it gains recognition at a certain period of historical 



320 HISTORICAL concp:ption of economics, [chap. IX, 

made at this point in regard to the bearing of such 
relativity upon the question whether economics must be 
regarded as a distinctively historical science'. 

In the first place, the mere fact of a progressive 
evolution of industrial conditions by no means establishes 
the impossibility of general economic laws. There may 
be much that is common to the different stages of de- 
velopment ; the same tendencies may be in operation in 
varying circumstances. Nothing more, therefore, than 
special modifications of the general laws may be requisite 
in order to suit special cases as they arise. It has been 
shewn that, notwithstanding the relativity of concrete 
economic doctrines, a certain character of universality 
belongs to the abstract theory of political economy. 

In the second place, in so far as each epoch has a 
political economy peculiar to itself, the question still 
remains how that political economy is to be established. 
Hence, regarded as a system dealing primarily with the 
economic problems of our own age, no need is shewn for a 
transformation of the existing science. At most all that 
is necessary is the recognition that in regard to many of 

development — itself exists only as the offspring of the time, and 
marks but a stage in the historical development of political economy" 
{Die poUtische Oekonomie vovi gcscMchtliclien Standpvnkte, 1883, 
pp. 24, 5). Knies allows abstraction and the deductive method 
a place in political economy, provided that they are employed with 
due precautions, and that the results obtained by their aid are em- 
pirically tested before being regarded as conclusively established 
(p. 499). The jJosition granted to other methods than the historical 
remains, nevertheless, a very subordinate one. 

1 But see, further, the concluding paragraph of this note (p. 327), 
where the argument is turned the other way. 



NOTE B.] HISTORICAL CONCEPTION OF ECONOMICS. 321 

its doctrines, as ordinarily laid down, some limitation of 
their sphere of application is essential. 

Professor Schmoller of Berlin goes further in the 
direction indicated by Knies, and in some of his utterances 
seems practically to identify economic science with the 
philosophy of economic history, or even with economic 
history itself in its broadest outlines. He holds that at the 
stage we have now reached we had better not attempt to 
formulate economic laws. We must rest content to work on 
at specific historical investigations, observing and recording 
actual economic phenomena, classifying them, and searching 
into their causes. There is an underlying implication that 
this search is likely to be successful, notwithstanding the 
alleged impossibility of formulating economic laws. 

The denial that it is possible to arrive at economic laws 
seems, however, not intended to apply to laws of economic 
development. At any rate an express exception in regard 
to the latter is made by some extreme advocates of the 
historical method. While the changing nature of industrial 
conditions is insisted upon, it is held that the laws of these 
changes may be discovered, and that such laws will be 
universal in their character. Political economy is ac- 
cordingly to be transformed into "a doctrine of the laws 
of the economic development of nations."^ 

Somewhat similarly, Professor Ashley — after remarking 
that among economists who employ the historical method 
there is considerable divergence of opinion as to the kind 
of results to be aimed at, and the shape political economy 

1 This was Hildebrand's ultimate object. Compare also Ingram, 
Hktorij of Political Economy, pp. 201 to 206; and Cliffe Leslie, 
Essays in Political and Moral Philosophy, pp. 83, 190. 

K 21 



322 HISTORICAL CONCEPTION OF ECONOMICS. [CHAP. IX. 

should assume — expresses what may be taken for his own 
view as follows : " An increasing number — ' the historical 
school ' in the strict sense of the word — ^hold that it is 
no longer worth while framing general formulas as to 
the relations between individuals in a given society, like 
the old ' laws ' of rent, wages, profits ; and that what they 
must attempt to discover are the laws of social development 
— that is to say, generalizations as to the stages through 
which the economic life of society has actually moved. 
They believe that knowledge like this will not only give 
them an insight into the past, but will enable them the 
better to understand the difficulties of the present."^ 

Political economy is here resolved into a philosophy of 
economic history. It is held to be possible to determine 
economic laws ; but such laws belong to a different sphere 
from that of the laws ordinarily formulated by economists. 
Two propositions have to be established in order to make 
good this position : first, that any theory of economic 
development must rest on an historical basis ; secondly, 
that an economic science worthy of the name is an impossi- 
bility except in so far as it consists of a theory of economic 
development. 

The first of these propositions would now meet with 
almost universal acceptance. It has been laid down in the 
preceding chapter that so far as any satisfactory theory of 
economic development can be foi"mulated, its foundation 
must be sought principally in a direct appeal to history. 
Assistance may be derived from a comparison of European, 
oriental, and savage states of society at the present time ; 

1 Englisli, Economic History and Theory, Preface. 



NOTE B.] HISTORICAL CONCEPTION OF ECONOMICS, 323 

but the main resource must be a comparison of successive 
states of society in the past. Whilst, however, the theoiy 
of economic development affords the most appropriate 
sphere for the employment of the historical and com- 
parative method, it should be added that the function of 
establishing general laws of economic evolution is to be 
regarded as one which the method may fulfil in the future, 
rather than one which it has up to the present tiuie gone 
very far towards fulfilling. 

Passing to political economy, regarded as a statical 
science, the ultra-historical doctrine under discussion in- 
volves not so much its regeneration as its simple negation. 
We must not ask what new theories of value, rent, money, 
international trade, ifec, are to replace those that it is 
sought to destroy. Such theories, we are told, it is "not 
worth while " to formulate ; or rather, with the materials 
at present available, they cannot be formulated so as to be 
of any real utility or importance. 

Positively to meet this attack would require a careful 
statement and detailed defence of particular economic laws, 
shewing not merely their hypothetical truth, but also their 
effective bearing on concrete economic phenomena. Such 
a defence of political economy cannot be attempted here. 
It must suffice to refer to the best contemporary treatises 
on the science. In examining, however, the claims put 
forward on behalf of the purely historical method, it is 
important to observe that if the impossibility of establishing 
economic laws throws us back upon specific historical in- 
vestigations, still such investigations cannot in themselves 
constitute a science of political economy. Instead of 
economics being converted into a distinctively historical 

21—2 



324 HISTORICAL CONCEPTION OF ECONOMICS. [CHAP. IX. 

science, it is made to stand aside in order that economic 
history may take its place. The claim that the historical 
method shall dominate political economy resolves itself 
from this point of view into the assertion of tlie supreme 
and paramount importance of the work of the historian as 
compared with that of the theorist'. 

But we are told that the establishment of economic 
laws is only postponed. "It is by no means a neglect of 
theory," says Professor Schmoller, "but the necessary basis 
for it, if at times we proceed mainly in a descriptive 
manner. Only in so far as the descriptive material is 
defective are reproaches against this method justifiable."- 
Theoretical economists, however, have never denied that 
there is an ample field of work for economic historians, 
and they welcome any assistance in their own sphere of 
enquiry that historians may be able to afford. What they 
protest against is the view that besides the collection of 
descriptive material there is, in the present stage of 
economic knowledge, no useful work to be done. They 
protest also against the confusion of the descriptive 
material of a science with the science itself. As observed 

1 Professor Menger complaius with considerable justice that the 
advocacy of the historical method in an extreme form does not arise 
out of the scientific needs of economists who are investigating the 
problems of their own science, but is rather forced on the science 
from outside. "The historians," he says, "have stepped upon the 
territory of our science like foreign conquerors, in order to force upon 
us their language and their customs, their terminology and their 
methods, and to light intolerantly every branch of enquiry which does 
not correspond with their special method" {Die Irrthumer des His- 
torismus in der Deutschen Natioiudokonomie, Preface). 

" Zxir Litteratiirge^cliichte der Staats- iind Sozialunsseiischaften, 
p. 279. 



NOTE B.] HISTORICAL CONCEPTION OF ECONOMICS. 325 

by Professor Sax, it cannot but be regarded as a thoroughly 
wrong idea to bid our age renounce the vocation of 
obtaining a satisfactory theory of political economy until 
such time as an incalculable number of investigations in 
the sphere of economic history shall have been completed \ 

Taking our stand simply on the necessity for scientific 
division of labour, it is better that those who are woi^king 
in the field of economic theory should do what they can 
with the materials already available, rather than that they 
should occupy their time with researches that belong to 
the province of pure historians. The more thoroughly the 
historical enquiries are carried out the better ; for thorough 
work in any department of economic study will be an 
assistance, not a hindrance, to workers in other depart- 
ments. But there is work of more than one kind to be 
done. 

Over and above any dispute, however, as to the most 
fruitful direction of enquiry in the particular stage of 
development that political economy has now reached, there 
is involved in the ultra-historical view an exaggerated 
idea of the sufficiency of the part that historical material 
can ever play in the building up of the science, and of the 
extent to which, without the aid of explicit theory, the 
historian can assign to phenomena their causal connexions. 
It has been already shewn that economic history itself needs 
to be interpreted by theory. Moderate advocates of the 
historical method, such as Arnold Toynbee, have clearly 
recognised that "without the help of deduction, this method 
can serve only to accumulate a mass of unconnected and 

1 Das Wesen unci die Aufgahen cler Nationalnkonomie, p. 3. 



326 HISTORICAL CONCErTION OF ECONOMICS. [CHAP. IX. 

unserviceable facts." ^ It follows that to postpone con- 
siderations of theory until an indefinite number of facts 
have already been collected is, even from the historical 
point of view, a mistake. 

The case against the supremacy of the historical method 
in economics is all the stronger, if we regard the method 
as literally confining itself to the facts of past times. For 
the purely historical method is obviously much narrower 
than the inductive ; and it will hardly be denied that the 
facts which are essential to the econondst are to a very 
great extent obtained from contemporary observations or 
from records so recent that they have hardly yet passed 
into what we understand by economic history. Moreover, 
inferences based on historical research, as distinguished 
from observation of the present order of events, labour 
under special disadvantages. Often there is more or less 
uncertainty concerning the facts themselves. " History 
has suffered to drop from her pages, perhaps has never 
recorded, much of the information which would now be 
most precious to us"'^; and an incomplete record may l)e 
even worse than no information at all, so far as affording a 
basis for theoretical conclusions is concerned. We see tlie 
past as it were through a mist ; and we cannot " cross- 
examine its facts " as we often can the facts of the present 
time^ 

1 F. C. Montague, Arnold Toynhce (Johns Hopkins University 
Studies in Historical and Political Science, Seventh Series, i. \}. 33). 

- Eichard Jones, Literary Remains, p. 570. 

» Compare Marshall, Present Position of Economics, § 17. Wagner 
also calls attention to the special caution that has to be exercised in 
appealing to historical evidence, just because the historical method 
"cannot grant a premeditated, to say nothing of an experimental, 



NOTE B.] HISTORICAL CONCEPTION OF ECONOMICS. 327 

It is still more important to observe that just 
because of the evolution of industrial systems, and the 
shifting character of economic conditions, upon which the 
historical school of economists so much insist, the study 
of the past is rendered the less serviceable for the solution 
of present-day problems. Upon many of these problems 
extremely little light is thrown by economic history that is 
more than a hundred years old. How indeed can gene- 
ralizations based upon one set of circumstances be safely 
applied to quite another set of circumstances? Not only 
may the problems calling for solution be novel in their 
character ; there may even arise new industrial classes. 
With what classes in the fourteenth century, for example, 
are we to compare the modern factory operative and the 
modern capitalist employer? If, therefore, for no other 
reason than that institutions and habits and conditions 
change, another method of investigation than the historical 
must for very much of our economic work be essential. 
Political economy can never become a specitically historical 
science. 

isolatiou of causes" {Grundlegung der yolitischen Oekonomie, vol. i., 
p. 223). 



CHAPTER X. 

ON POLITICAL ECONOMY AND STATISTICS. 

I 1. TJie claims of statistics to he regarded as a 
distinct science. — A leading German statistician has 
gone St) far as to say that there are ahnost as many 
different views of the nature and province of statistics, 
as there arc writers who have occupied themselves 
with the subject. Many different definitions of the 
term statistics have also been proposed; a list of 180, 
more or less differing from one another, was drawn up 
by Quetelet as long ago as 1869. Even the etymology 
of the term, or at all events the mode of its derivation 
from the Latin status, has been a matter of dispute \ 

1 The correct account of the derivation of statistics seems to be 
that it came through the Itahan stato, which was in the fifteenth 
century first used in the signification of territory, or "state" in the 
political sense. See Eiimelin, article Stntistik in Schonberg's Hand- 
buck, § 2 ; and Wappiius, Einleitung in das Stiidmm der Statistik, 
p. 7. "Achenwall," says Professor Wappaus, "never in his writings 
explained the origin of the name statistics, but it comes out in his 
lecture-notes. His explanation is as follows. The Italians were the 
first to form a science of the State, and called it Ragionc. di Stato. 
From this — in Latin writings, and lectures given in Latin — arose 
Eatio status, or Disciplina de ratioiie status, or Disciplina de statu. 



CHAP. X.] ACHENWALL. 329 

Only two or three views, however, such as are most 
broadly distinguished from one another, need be noticed 
here. 

Gottfried Achenwall, professor of law and politics at 
Gottingen about the middle of the eighteenth century, 
though not the originator of the Latin adjective statis- 
ticiis, appears to have been the first to use the German 
substantive Statistik, and he is usually regarded as 
the founder of statistics considered as a special branch 
of knowledge^. He meant by. statistics a collection of 
noteworthy facts concerning States — the historical and 
descriptive material upon which political science, as we 
now understand it, is largely dependent. It is to be 
added that as treated by the school of statisticians to 
which Achenwall belonged — the so-called "descriptive" 
school — statistics was not essentially numerical or 
quantitative. Verbal description took the first place, 
and figures were used merely as accessory thereto. 

Since the time of Achenwall the term, as ordinarily 
used, has changed its meaning, and the distinguishing 

There being in classical Latin no simple expression for ' state ' in our 
sense, the word status was used with this meaning. The Italians at 
the same time gave to any one learned in the above science or art 
the name statista. German scholars adopted the word statista into 
Latin, and formed the adjective statisticus." 

1 This view is not strictly correct, as Achenwall had predecessors 
at the German universities (Conring, Schmeitzel, and others) whose 
subject-matter and method resembled his own. His treatment was, 
however, more thorough than theirs, and attracted more attention. 



330 POLITICAL ECONOMY AND STATISTICS. [CHAP. 

mark of statistics is considered to be the employment 
of numerical data^ Moreover, regarded as a science, 
statistics is not content to be merely descriptive, but 
claims to be theoretical and speculative. The principal 
question at issue is whether statistics can legitimately 
be regarded as constituting a distinct science at all. 
This question is complicated by the foct that, in addition 
to Achenwall's view, two very different conceptions of 
statistics as a science have been formed. 

Statistical science is, according to Dr Mouat, " a 
special science of methods from which, and by which 

1 Statistics in this sense may be traced back to the " Political 
Arithmetick " of Sir William Petty, and other English writers of the 
seventcentli and tighteenth centuries; and the influence of Quetelet 
and Knies was important about the middle of the nineteenth century in 
favour of the arithmetical, as opposed to the descriptive, school. The 
latter still has some, though not many, adherents. The late Pro- 
fessor Wappaus of Gottingen, for example, in his Einleitung iu das 
Stvdium der Statistik, published after his death in 18S1, defends 
Achenwall's conception. He recognises that quantitative data have 
assirmed a greater relative importance than formerly, but he ascribes 
this simply to the fact that they are now more easily procurable. 
"The increased facilities for obtaining numerical facts have," he 
says, "necessarily affected the method of statistics. We now have 
two equally important resources : description, and numerical expres- 
sion. The two methods supplement one another, and it is a mistake 
to try to make two separate branches of science out of them. Mis- 
understandings have arisen about statistics, because demands have 
been made upon it, which cannot be fulfilled — demands only to be 
satisfied by a purely philosophical branch of study, which statistics 
is not. Statistics is a positive science, an aggregate of knowledge 
brought together for a practical end, namely, the knowledge of the 
concrete State. Thi^ is a very simple definition, and justified by the 
genesis and history of the science" (pp. 32—4). 



X.] STATISTICS REGARDED AS A SCIENCE. 831 

alone, the natural laws can be deduced which govern 
most of the conditions of man, and many of those of 
the animal and vegetable kingdoms." " There is not," 
Dr Mouat adds, " a branch of human knowledge to 
which the science of statistics is not closely allied, and 
for the correct understanding of which the scientific 
marshalling of figures, and observation of aggregate 
facts, is not more or less necessary. That the laws 
deduced from them fall into the ranks of the branches 
of knowledge to which they belong when they are 
fairly established does not, in my humble judgment, 
invalidate the scientific claim of the agency to which 
they owe their existence."^ 

The concluding portion of the above statement 
would probably meet with universal acceptance. A 
method or an agency may, however, be scientific 
without thereby becoming itself a science. Statistics, 
or statistical method, as understood by Dr Mouat, is 
a very important means whereby human knowledge 
is extended ; but as such it is to be regarded as a 
scientific instrument, rather than as an independent 
body of doctrine constituting a distinct science. . 

It is, indeed, necessary to recognise a theory of 
statistics, dealing with what may be called the tech- 
nique of the statistical method, that is to say, the 

1 History of the Statistical Science of London (Jubilee volume of 
the Statistical Journal), p. 47. 



332 POLITICAL ECONOMY AND STATISTICS. [CHAP. 

conditions that statistical data must fulfil, the modes 
in which they are to be ascertained and collected, 
the manner of their arrangement and employment for 
purposes of reasoning, the criteria determining the 
validity of arguments based upon them, and the logical 
character of the conclusions established by their aid. 
But all this is really antecedent to the actual use of 
statistics for any particular purpose. The whole discus- 
sion constitutes, not a separate science, but a special 
branch or department of inductive logic or methodo- 
logy — that is, of the science or art which treats of 
scientific method in general. 

It is, however, in quite a different sense from the 
above that the existence of an independent science 
of statistics is affirmed by the majority of Conti- 
nental statisticians, and also by some English writers ^ 
Statistical science is regarded, not as an abstract science 
of methods dealing with phenomena of very various 
kinds under a distinctive aspect, but as a concrete 
science with a distinctive subject-matter. A distinction 
is clearly drawn between statistics as a method and 

^ Compare Mr Wynnard Hooper's paper on the Method of Statin- 
tical Analysis in the Statistical Journal for March, 1881 ; and the same 
writer's article on Statistics iu the ninth edition of the Encyclopaedia 
Britannica. Mr Hooper himself takes the view advocated in the text, 
namely, that there is no independent science of statistics. The two 
views are sometimes spoken of as the English and the Continental 
respectively. There is not, however, universal agreement amongst 
Continental, any more than amongst English, writers on the subject. 



X.] STATISTICS REGARDED AS A SCIENCE. 333 

statistics as a science. It is recognised that the 
method has a very wide application; but the science 
is described as studying exclusively man's social life. 

As thus interpreted, statistical science becomes 
practically equivalent to sociology, with the implication 
that the sole means whereby sociological, including 
economic, knowledge can be attained is the systematic 
collection and inductive interpretation of social pheno- 
mena. There is the further implication that the data 
are mainly, if not exclusively, numerical. 

Dr Mayr, taking this view, defines the science of 
statistics as " the systematic statement and explanation 
of actual events, and of the laws of man's social life 
that may be deduced from these, on the basis of the 
quantitative observation of aggregates."^ 

If it is asked why the quantitative observation of 
social aggregates should constitute a distinct science, 
while no similar claim is made in regard to the ob- 
servation of purely physical aggregates, the reply given 
is that in the determination of the laws of social 
life statistical enquiry is " the only possible mode of 
investigation," and not — as in the case of the physical 
sciences — a merely secondary or supplementary method. 

1 This definition is given in Dr Mayr's Die Gesetzmdssigkeit im 
Gesellscha/tsleben, an abridged translation of which will be found in 
the Statistical Journal for September, 1883. For definitions given by 
English statisticians, who take a similar view, see StatisticalJournal, 
December, 1865, p. 492 ; and Jubilee volume, p. 8. 



334 POLITICAL ECONOMY AND STATISTICS. [CHAP. 

Social science and political economy are spoken of as 
branches or departments of the science of statistics, 
a science which studies social and economic phenomena 
in the only satisfactory way, namely, by the accumula- 
tion of facts and generalization from them. It will 
be observed that the doctrine here set forth is even 
narrower than that which regards induction as the sole 
valid method of economic enquiry. For we are now 
limited to quantitative induction; qualitative induction, 
whether historical or comparative, is out of place as 
well as the deductive method. 

Our grounds for rejecting this view have been given 
in a previous chapter, and to pursue the discussion here 
would merely carry us back to a class of considerations 
that have been already sufficiently insisted upon. It 
may, however, be added that for the general science of 
society we have at any rate another name — sociology 
or social science — which does not beg the question as 
to method, and which is free from the ambiguity that 
at best must attach to the term statistics. For it has 
to be allowed that by this term is also meant a method 
of analysis having an indefinitely wide range of appli- 
cation outside the science of man in society. Thus we 
speak of moral and intellectual statistics, of vital and 
medical statistics, of astronomical and meteorological 
statistics, of physical and physiological statistics, as well 
as of economic and political statistics. It can hardly be 



X.] STATISTICS REGAEDED AS A SCIENCE. 335 

said that there is any concrete department of enquiry, 
in which statistics as a method may not find a place; 
and it is upon this character of universality that the 
claim of statistical research to public recognition and 
encouragement is frequently based. 

If a less extreme view than that above described 
is taken, and statistics is considered to be a distinct 
science, but nevertheless not to include the whole of 
social science or of economics, then it becomes a part 
which is only differentiated from the remainder by the 
employment of a particular method. Professor R. Mayo- 
Smith explicitly recognises statistical science as " a 
branch of social science employing a specific method, 
and devoting itself to those problems of life in society 
which can best be solved by that method." ^ It seems, 
however, both unusual and undesirable to differentiate 
sciences by their method as distinguished from their 
subject-matter. We might equally well identify other 
scientific methods with those particular sciences in the 
development of which they happen to be of special 
importance. At any rate the question now becomes 
little more than a verbal one. There need be no 
fundamental disagreement between those who take 
the view just indicated, and those who prefer to treat 

1 Statistics and Economics (Publications of the American Eco- 
nomic Association, vol. 3), p. 118. Professor Mayo-Smith divides social 
statistics into population statistics, economic statistics, and statistics 
of vice and crime. 



836 POLITICAL ECONOMY AND STATISTICS. [CHAP. 

statistics simply as a particular method or instrument 
of scientific enquiry, which is not peculiar to the study 
of social facts, although it may be of much greater 
relative importance in connexion with that study than 
in other departments of knowledge. 

There seems, however, to be an idea that if the 
claim of statistics to recognition as a science be not 
admitted, then the statistician becomes a mere drudge, 
who is denied the luxury of opinions, and whose sole 
function is to collect materials for others to reason 
about and base theories upon. Professor Mayo-Smith's 
main ground for calling statistics a science is that this 
is the only way of rescuing the study from "the barren- 
ness which results from viewing its object as simply 
the collection of masses of figures, with which the 
statistician has nothing further to do." He regards 
the question whether statistics is or is not a science 
as not a merely verbal one, because the answer to it 
determines " the position of the statistician and the 
authority with which he speaks." 

By another writer it is said that if statistics is not 
a science, then the statistician is merely as one who 
binds up sheaves of wheat for others to thresh out\ 
But this by no means follows. There is, indeed, special 
risk of error when statistics are used by others than 
those who have prepared them. For, as Mr Hooper 
1 Dr Guy in the Statistical Journal, 18G5, p. 483. 



X.] STATISTICS REGARDED AS A SCIENCE. 337 

remarks, " there are usually ' pitfalls ' even in the 
simplest statistical statement, the position and nature 
of which are known only to the persons who have 
actually handled what may be called the 'raw material' 
of the statistics in question." Hence the statistician 
rightly, and even necessarily, performs the function 
of interpreting results. But in so doing he becomes 
the economic statistician, the political statistician, the 
medical statistician, the physical statistician, as the 
case may be. He applies his statistics, that is to say, 
within the domain of some particular science; and it 
may be added that unless he has an adequate knowledge 
of that science, not only will he probably go astray in 
his interpretation, but the very facts themselves are 
not likely to be suitably selected or arranged. 

But all this, it is clear, applies to medical and 
physical and other statistics, just as much as to social 
statistics ; and no one would maintain that we have 
a distinct science, wherever we have a branch of know- 
ledge in which statistics may be usefully employed. 
Hence if we go out of our way to recognise a science 
of statistics which is concerned with social phenomena 
alone, we seem thereby to cast an undeserved slur upon 
statistics used in other departments of enquiry. We 
may, on the other hand, refuse to recognise a distinct 
statistical science in any sense, without lowering the 
standard of what is required from statisticians, or in 
K. 32 



338 POLITICAL ECONOMY AND STATISTICS. [CHAP. 

the slightest degree underrating the importance of the 
functions which they perform. 

§ 2. Statistics regarded as a method. — In seeking to 
define statistics regarded as a method, it is convenient 
to adopt the somewhat clumsy phrase already quoted 
from Dr Mayr, and say that it is a scientific method 
based on the quantitative observation of aggregates. It 
is, in the first place, a method based on observation. 
It goes direct to facts, which it collects and systema- 
tically arranges. It is, in the second place, based on 
an observation of quantities. It deals with phenomena 
that are measurable, and hence capable of numerical 
expression. It is, in the third place, concerned with 
aggregates, as distinguished from individuals or units. 
Series of isolated numerical facts are popularly called 
statistics, and they may be of use simply as informa- 
tion or as means of description or illustration, but they 
are of little or no value as a scientific instrument. In 
the scientific use of statistics the observations must 
be made in the mass, they must involve a certain 
degree of continuity, and the resulting figures must 
be carefully and systematically grouped ^ 

' The term statistio;, when used as a singular noun, signifies the 
method above described, or — if we recognise such a science —the 
science of statistics (German, die Statistik; French, la t^tatiatique). 
In Enghsh, however, the term is generally used as a plural noun, 
and it then signifies the numerical data which constitute the basis of 
the statistical method. 



X.] THE METHOD OF STATISTICS. 339 

By the aid of statistics, thus understood, we are 
enabled to employ the method of concomitant varia- 
tions. In this way, quantitative inductions are esta- 
blished, and the laws of the variations of phenomena 
determined. 

There is a close connexion between the statistical 
method and the doctrine of chances. On the basis of 
the quantitative observation of aggregates, the influence 
exerted in individual cases by accidental causes may be 
eliminated. For when instances are taken in the mass, 
it is often a fair assumption that accidental causes will 
operate so as to neutralise one another. The effects of 
agencies exerting a permanent influence on phenomena 
of a certain description can in this way be calculated, 
even though in any given individual case their influence 
may be slight and uncertain. The manner in which 
aggregate regularity is found to emerge out of indi- 
vidual irregularity, when instances are taken in sufficient 
number, has been one of the most striking results of 
statistical research. It was this fact that excited the 
enthusiasm of the Belgian mathematician Quetelet; 
and to his influence may be ascribed the impetus given 
to the study of statistics in the second quarter of the 
nineteenth century. 

In the use of statistics, considerable assistance may 
often be derived from the employment of diagrams. 
The graphic method is not only useful for the popular 

22 2 



340 POLITICAL ECONOMY AND STATISTICS. [CHAP. 

exposition of statistics, enabling the mind more accu- 
rately to realise numerical comparisons ; but it has also 
a genuine scientific value. Thus by means of graphic 
representation we may employ the special method of 
quantitative induction called by Whewell the metJiod 
of curves^. The relative positions of curves can be 

1 The graphic method takes different forms. Straight hnes of 
different lengths, for example, are sometimes used, and rectangles, or 
triangles, or other geometrical figures, the relative size of which can 
easily be compared. Maps are also very serviceable as a popular 
method of illustration, where the statistics relate to different geo- 
graphical divisions. Statistical maps are sometimes called carto- 
grams, cartography being defined as "the employment of maps 
for the graphic illustration of statistics." The above forms have 
not, however, the scientific value that belongs to the use of curves, 
so drawn as to represent the manner in which the variations of 
some given quantity are related to the variations of some other 
quantity. Whewell defines the method of curves as follows: "The 
Method of Curves consists in drawing a curve, of which the 
observed quantities are the Ordiuates, the quantity on which the 
change of these quantities depends being the Abscissa. The efficacy 
of this Method depends upon the faculty which the eye possesses, of 
readily detecting regularity and irregularity in forms. The Method 
may be used to detect the Laws which the observed quantities follow ; 
and also, when the Observations are inexact, it may be used to correct 
these Observations, so as to obtain data more true than the observed 
facts themselves" (Novum Organon Eenovatum, Aphorism xliv). On 
the graphic method of statistics in general, see a paper by Professor 
Marshall in the Jubilee volume of the Statistical Journal; also 
Dr D. E. Dewey's Elementary Notes on Gra2)hic Statistics, Mr Bowley's 
Elements of Statistics, Part i.. Chapter 7, and the article on Graphic 
Method by Mr A. W. Flux in Mr Palgrave's Dictionary of Political 
Economy. Practical examples of the employment of this method will 
be found in Jevons's luvestiyations in Currency and Finance. The use 
of diagrams for statistical purposes should be clearly distinguished from 
their employment in economic theoi'y as discussed in a previous chapter. 



X.] GRAPHIC STATISTICS. 341 

more easily compared than columns of figures; and cor- 
respondences may thus be observed, and empirical laws 
suggested, that would otherwise have escaped attention. 
This is especially true when there are more than two 
series of phenomena whose mutual relations are made 
the subject of investigation. The mere saving of space 
may be a matter of importance. Several distinct curves 
can be placed in a single chart, and it thus becomes 
possible to grasp at one and the same moment a greater 
mvdtiplicity of detail^. 

The use of curves also renders us less liable to be 
distracted by movements of a partial or temporary 
character. There are indeed cases, as pointed out both 
by Whewell and by Jevons, where diagrams to a certain 
extent supersede the taking of averages; for we may 
apprehend intuitively the general course of a curve, 
neglecting individual irregularities. A similar appre- 
hension would generally speaking not be possible, or at 
any rate not equally reliable, were we limited to mere 
columns of figures-. 

1 Care must be taken to render it easy to follow the course of the 
different curves withoiit risk of their being confused one with another. 
They may be distinguished by form as well as by colour. Thus one 
curve may consist of an unbroken line, another of a broken line, 
another of a succession of dots, another of dots and dashes alter- 
nately, and so on. 

2 It should be added that whilst the graphic method of statistics 
is — for the reasons above stated — scientifically important, certain 
precautions are necessary in order to prevent the comparison of curves 



342 POLITICAL ECONOMY AND STATISTICS. [CHAP. 

§ 3. The functions of statistics in economic en- 
quiries. — Cairnes lays it down that " the relation of 
statistics to political economy is in no respect different 
from that in which they stand to other sciences which 
have reached the deductive stage.'" But this summary 
dismissal of the question cannot be accepted. In the 
first place, notwithstanding the importance of deduction 
in economics, the science cannot be regarded as having 
reached the deductive stage in the same definitive 
manner as those sciences with which an analogy is 
here suggested — for instance, physics and astronomy. 
Its premisses are less determinate than theirs, and 
greater prominence needs to be assigned to empirical 
confirmation and criticism. In the second place, al- 
though statistics ought not to be identified with 
sociology, the quantitative observation of aggregates is 
certainly of far greater relative importance in the social 
sciences than it is in the great majority of the physical 
sciences. In the latter — for instance, in optics or in 
electricity — so far as conclusions rest on an inductive 

from proving deceptive. This is especially the case when we represent 
by curves the progress of phenomena, with a view to comparing 
their proportional rates of progress. Professor Marshall indicates 
the nature of the needful precautions in the paper referred to in the 
note on p. 340. 

1 Logical Method of Political Economy, p. 86. While the above 
is given as summing up Cairnes's view of the relation between statis- 
tics and 23oliticaI economy, some of his incidental remarks on the 
subject seem to indicate a less extreme position. 



X.] FUNCTIONS OF STATISTICS. 343 

basis, it is usually a basis of experiment. Individual 
cases can be treated as typical ; and where a repetition 
of trials is necessary, it is only in order to guard 
against error. The statistical method is important in 
special instances, e.g., in meteorology, but generally 
speaking it occupies a subordinate position. In the 
social sciences, on the other hand, there is little room 
for experiment, while statistics play a part for which 
no substitute can be found. Political economy, in par- 
ticular — being concerned pre-eminently with quantities, 
and with groups as distinguished from individuals — 
has a special tendency to become on its inductive side 
statistical, just as on its deductive side it tends to 
become mathematical. 

To begin with, statistics are of paramount import- 
ance in economic enquiries in respect of their merely 
descriptive functions. For example, statistics of pro- 
duction and of wages and prices are essential elements 
in any complete description of the social condition of a 
community; statistics of exports and imports in the de- 
scription of its foreign trade and intercourse with other 
nations; statistics of taxation and of national indebted- 
ness in the description of its financial condition. This 
point is, however, so obvious that we need not dwell 
upon it, but may pass on to consider further uses of 
statistics in economic enquiries. 

The functions of statistics in economic theory are, 



344 POLITICAL ECONOMY AND STATISTICS. [CHAP. 

first, to suggest empirical laws, which may or may not 
be capable of subsequent deductive explanation; and 
secondly, to supplement deductive reasoning by check- 
ing its results, and submitting them to the test of 
experience. Statistics play a still more important 
part in the applications of economic science to the 
elucidation and interpretation of particular concrete 
phenomena. 

We have seen that there are certain departments 
of economics in which we are compelled to content our- 
selves with empirical laws. In such cases we are usually 
concerned with aggregates, and can make little or 
nothing of individual phenomena taken by themselves. 
Our main reliance must, therefore, be placed upon sta- 
tistics, which may be either historical or coiitemporary. 
An illustration is once more afforded by the Malthusian 
doctrine of population. Malthus himself made elaborate 
statistical enquiries concerning the proportion of yearly 
marriages to population; the fruitfulness of marriages 
in different countries; the effects of epidemics on births, 
deaths, and marriages; and so forth. He hence inferred 
that in favourable circumstances population tends to 
double itself in twenty-five years ; and on a similar 
basis he estimated the effects of the various checks to 
population operating in the less civilised parts of the 
world, and in past times, as well as in the different 
States of modern Europe. 



X.] GENEEALIZATIONS BASED ON STATISTICS. 345 

In this connexion it is once more necessary to point 
out the characteristic weakness of empirical generaliza- 
tions. They may be true of a given state of society, 
but with the changes incident to the progress of time 
may become false. It is necessary, therefore, to keep 
as it were a watch upon them, and from time to 
time bring up to date the statistics upon which they 
are based. It is no exaggeration to say, as Sir Robert 
Giffen has said, that Malthus's statistical enquiries 
remain as valuable as ever. At the same time, further 
experience gained during the present century suggests 
certain qualifications in the statement of the Malthusian 
doctrine, and in some degree modifies the practical con- 
clusions drawn from it. 

Empirical laws need not, however, always remain 
such. Statistical investigations may suggest laws 
which can subsequently be established on a more or 
less satisfactory deductive basis. In other words, the 
observed uniformities may be referred to causes which 
are adequate to account for them, and which are shewn 
to be in operation. Thus the tendency of financial 
crises to recur at periodical intervals was not first 
worked out theoretically; it was disclosed by statistical 
observations, and theories to account for the cyclical 
movement were afterwards propounded. Another 
simple illustration is to be found in the autumnal 
drain on the Money Market. 



346 POLITICAL ECONOMY AND STATISTICS. [CHAP. 

Besides affording absolute additions to economic 
knowledge, statistics are of great value in enabling 
the deductive economist on the one hand to test and 
where necessary modify his premisses, and on the other 
hand to check and verify his conclusions. By means 
of statistics, also, he may sometimes roughly measure 
the force exerted by disturbing agencies. 

Thus, Mr Bagehot appeals to statistics to test the 
legitimacy of the postulate that in modern industrial 
communities there tends to be a movement of labour 
from the worse paid to the better paid localities. He 
holds that patent statistical facts shew what may be 
called " the tides " of the people, the set of labour 
being steadily and rapidly from the counties where 
there is only agriculture and little to be made of new 
labour, towards those where there are many employ- 
ments and where much is to be made of it\ Statistics 
may, again, be called in to determine how far in a 
given state of society this tendency does actually 
result in an equality of wages, or how far there are 
other strong forces in operation which succeed in more 
or less counteracting it. 

Another illustration is afforded by the functions of 

statistics in the controversy between free traders and 

protectionists. Statistics cannot by themselves decide 

this controversy, but they are of assistance in supple- 

1 Economic Stiidifn, p. 22. 



X.] PROBLEMS INVOLVING STATISTICS. 347 

menting more abstract reasoning. The free trader, 
whilst basing his conclusions mainly on a deductive 
process, is bound to deal with all available statistics, 
shewing in what respects they bear out his theory, 
and in what ways any apparent inconsistencies may 
be accounted for\ 

Attention may especially be called to the part 
capable of being played by statistics in the solution 
of problems that are left theoretically indeterminate. 
Let us assume, for example, that, so far as theoretical 
considerations are concerned, it is left an open question 
whether temporary protection is desirable in order to 
establish in a country a new industry; that is to say, 
theory shews that such protection may under certain 
conditions be advantageous, but that it is not necessarily 
so. Statistics relating to protected industries in new 
countries may help us in dealing with, this question 
generally, by shewing how far the conditions telling in 
favour of protection have as a matter of fact been 



1 Compare Lord Farrer, Free Trade versus Fair Trade, and Sir E. 
Giffen on the Use of Import and Export Statistics {Essays in Finance, 
Second Series). "Statistics," Sir Robert Giffen remarks, "though they 
cannot logically prove the affirmative in the direct issue between 
free trade and protection, from the difficulty of finding ' exactly 
parallel cases and eliminating other causes, may be used to prove 
negatively that there is nothing in the apparent facts to help the 
protectionist" (p. 223). In other of Sir R. Giffen's essays there 
are excellent instances of the mutual bearing on one another of 
statistics and deductive reasoning. 



348 POLITICAL ECONOMY AND STATISTICS. [CHAP. 

frequently realised, and in particular how ftir the pro- 
tection has justified itself by its continuance being 
rendered after a certain stage unnecessary. Statistics 
may also help us specifically if we are considering the 
problem in relation to some particular case in which 
the adoption of a jjolicy of temporary protection is 
contemplated ^ There are many other cases in various 
departments of economics in which theory takes us up 
to a certain point, but in which the theoretical discus- 
sion needs to be supplemented by statistics if we are 
to reach a determinate conclusion. 

If from considering how general theorems are to 
be established and tested we pass on to enquire how 
particular concrete problems are to be solved, we find 
that the aid to be derived from statistics is relatively 
even greater. There are many important problems 
of fact — especially where a comparison is instituted 
between different times or places, though not in this 
case alone — which are statistical in their very nature: 
for example, the enquiry whether during the last 
thirty years there has or has not been an appre- 
ciation in the value of gold ; the comparison between 
the position of the labouring classes now and fifty 
years ago; the analysis and explanation of the recent 
depression of trade ; the investigation of the relative 

1 Compare an article by Sir R. Giffen on Protection for Manufac- 
tures in New Countries (Economic Journal, March 1898, page 3). 



X.] PROBLEMS INVOLVING STATISTICS. 349 

pressure of taxation, under existing conditions, upon 
different classes of the community. A sound know- 
ledge of theory is requisite for a satisfactory treatment 
of problems of this kind. Theory guides us in our 
selection of statistics, and teaches us how to turn them 
to the best account. But the data for the solution of 
the problems must necessarily be numerical. 

In the majority of cases, moreover, aggregate regu- 
larity has to be evolved out of individual irregularity, 
and hence a special reason why we must deal with 
phenomena in the mass, and not individually. Thus — 
again taking as our examples the enquiries above re- 
ferred to — if we compare prices now with prices five 
and twenty years ago, some will be found to have fallen, 
some to have risen ; similarly if we compare wages now 
with wages fifty years ago; even in a year of depression 
some trades are found to be flourishing; the pressure 
of taxation varies in the case of different individuals 
in the same class. Averages must, therefore, be taken ^; 
and it is clear that the essential conditions for the 
right solution of the problems are reliable statistics, 
and ability to use the statistics in a sound manner. 

The right use of statistics is, indeed, far from being 



1 The imijortance of the taking of averages in statistical investiga- 
tions cannot be exaggerated. This is so fully realised by some writers 
that one of the definitions proposed for statistics is the " science of 
averages." 



350 POLITICAL ECONOMY AND STATISTICS. [CHAP. X. 

a simple matter. Statistics, it is often said, can be 
made to prove anything. And if they are used with- 
out special knowledge, or grouped simply with the 
object of establishing a foregone conclusion, the charge 
is well founded. As against ignorant or prejudiced 
statisticians, or against- the casual employment of a 
few figures picked up at random and regardless of 
what may be called their context, it is not difficult 
to defend the paradox that there is nothing more 
misleading than facts — except figures. For- reasoning 
from statistics, in addition to the dangers which it has 
in common with all empirical reasoning, is subject to 
difficulties and dangers peculiar to itself^. If, however, 
the limitations of statistics are clearly recognised, if 
they are accurately collected over an adequate range, 
if they are employed without prejudice and after full 
enquiry into their true significance, and if they are 
fairly and properly grouped, then their value is unique, 
and the statistical method easily makes good its claim 
to rank as a thoroughly effective and reliable instru- 
ment of science. 

^ The nature of these difficulties and dangers is briefly indicated 
in the note following this chapter. 



NOTE TO CHAPTER X. 

On some of the Precautions requisite in the 
Use of Statistics in Economic Reasonings. 

§ 1. Conditions of the reliability of statistical data. — 
If arguments based on statistics are to be of any value, 
particular attention must be paid to the following points : 
{a) the sources from which the statistics are obtained, 
with special reference to their reliability ; (h) their true 
meaning and significance ; (c) their completeness or incom- 
pleteness as covering the whole range of the phenomena to 
which they relate ; [d) the manner of their grouping, with 
special reference to the taking of averages. Each of these 
points may be briefly considered in turn\ . 

The initial difficulty in the use of statistics is the 
possible inaccuracy of the original data. Statistics may be 
obtained and published officially, or they may be collected 
through private channels. Under the former of these con- 
ditions, the accuracy of the figures is sometimes practically 

1 In what follows I am specially indebted to Sir R. Giffen's Essays 
in Finance, First and Second Series ; to papers on Statistics by Pro- 
fessor R. Mayo-Smith in the Political Science Quarterlij, the Quarterly 
Journal of Economics, and the Publications of the American Economic 
Association; and to various papers in the Journal of the Statistical 
Society. 



352 THE RELIABILITY OF STATISTICS. [CHAP. X. 

unquestionable ; as, for example, in the case of railway 
traffic receipts. But this is by no means the universal 
rule, even when official statistics are forthcoming. Thus 
up to 1854 the values of imports into this country were 
calculated at the prices of the end of the seventeenth 
century. From 1854 to 1870 they were officially computed 
according to the best information obtainable. At the 
present time both imports and exports are in this country 
valued according to the declarations of the importers and 
exporters. The returns are of course checked by the officers 
compiling the statistics ; but still their accuracy depends to 
a considerable extent upon the good faith and carefulness 
of the consignees and exporting agents, who it is said are 
often insufficiently instructed by their principals. The 
chance of error is greater in some cases than in others. For 
example, when goods are sent into the country to be sold 
on commission, there is no available invoice of the same 
definite character as when they are sent to order. Again, 
the check exercised by the customs' officers is likely to be 
more effective in the case of goods that are subject to a 
duty than in the case of those that are non-dutiable. 

The uncertainty attaching to the accviracy of statistics 
is still greater when they are collected through private 
channels. Wages statistics may be taken as a special 
example. If they are obtained by the simple process of 
writing to some individual in each district under investiga- 
tion, and asking him to give the best information in his 
power, they can hardly be of much practical \alue, unless 
the sources of the informant's own knowledge are fully set 
forth and are themselves capable of being tested. Both 
employers and workmen are in danger of being more or 



NOTE.] THE RELIABILITY OF STATISTICS. 358 

less unconsciously biassed by class prejudice or by consider- 
ation of the uses to which the information they afford may 
be put. Probably the best sources of information are 
the actual ledgers and pay-rolls of large establishments if 
recourse can be had to them, or records kept by trade 
societies primarily with a view to the enlightenment of their 
own members. When two or more sources of information 
are available, they will serve mutually to check one another. 

It is of importance that access should be had to the 
ultimate data themselves, and not merely to calculations 
based upon them. For instance, knowledge of the actual 
wages paid to individuals, and the number of men em- 
ployed at each rate, is of much greater value to the 
statistician than ready-made averages provided either by 
employers or workmen. This of course applies not only to 
wage-statistics, but to all statistics. 

Where the statistics are obtained by the issue of blank 
forms of enquiry to be filled in by a large number of in- 
dividuals, as in the case of census returns, the way in 
which the forms are drawn up may have a material effect 
on the accuracy of the answers. From this point of view 
the enquiries should be as simple as possible, and should be 
accompanied by clear instructions, so as to minimise the 
chance of unintentional or perverse mistakes on the part of 
those who have to answer them'. They should also be 

1 The chance of such mistakes is greater than would be imagined 
a priori. Thus, in the General Report on the Census of 1891, it is 
stated that the enquiry as to whether individuals were employers, 
employed, or working on their own account, was answered so imper- 
fectly and often in so contradictory a way as to make the returns on 
this point quite untrustworthy. 

K. 23 



354 THE EELIABILITY OF STATISTICS. [CHAP, X. 

framed in such a way as not to appear inquisitorial, and so 
as not to raise the idea that the information asked for may 
be used to the advantage or the detriment of the person 
making the return. Unless these conditions are satisfied, 
the answers may be intentionally erroneous or incomplete. 
It should be added that the answers to enquiries circulated 
in this way have to be tabulated and arranged before they 
properly constitute statistics, and that their value will very 
much depend on the method of tabulation adopted'. 

A distinction may be drawn between the absolute 
accuracy of statistical data, aiid their relative accuracy. 
In some cases, while absolute accuracy may be unattain- 
able, it may nevertheless be possible to institute quite 
reliable comparisons • and it is in the comparisons they 
enable us to make, not in the figures considered absolutely, 
that the value of statistics general!}' consists. In such 
cases relative accuracy is essential ; the statistics should 
be collected on the same method, and in similar circum- 
stances. If these conditions are fulfilled, error within 
certain limits need not be seriously misleading ; for, in 
accordance with the doctrine of chances, it may be a 
legitimate assumption that the error will exert approxi- 
mately the same proportional influence on each side of the 
comparison. 

It follows that in comparing statistics of any kind for 
consecutive years, what is specially important is that no 
chanse shall have been made in the mode or circumstances 
of their collection or estimation". For example, in com- 

1 For detailed iUustrations of methods of collecting and tabulating 
statistics, compare Bowley, Elements of Statistics, pp. 23 to 106. 

- Reference has been already made to the change in the mode of 



NOTE.] THE RELIABILITY OF STATISTICS. 355 

paring income tax returns at different periods, it may be 
necessary to make allowance for improvements in the means 
adopted for preventing false returns. It should also be 
remembered that in consequence of changes in the rate of 
the tax, inducements to falsify statements of income may 
be increased or diminished. 

In the case of official statistics, it is most desirable that 
on the occurrence of any change in methods of collection, 
the old method should for a few years be carried on along- 
side of the new. It can then be approximately calculated 
what allowance must be made for the change in compari- 
sons involving periods before and after it. 

A similar difficulty frequently arises when statistics of 
different nations are compared. There is, for instance, 
the greatest variety in the methods by which the values 
of exports and imports are calculated in different countries. 
It has already been mentioned that in England the practice 
is for values to be declared by exporters and importers. 
In most foreign countries, however, values are computed 
according to tables of prices officially drawn up*. With a 

estimating the values of imports into this country that occurred in 
1854, and striking instances could be quoted of errors due to ignorance 
or forgetfulness of this change. 

1 Again, "as regards the basis of valuation most European 
countries adopt the practice of valuing imports as they lie in the 
port of arrival, i.e., including cost of freight, and exports at their 
value at the port of export, i.e., excluding cost of freight. The 
United States, however, presents an exception to this practice as 
regards imports, which are valued according to the invoice values 
declared by the importers at the port of shipment, i.e., excluding the 
cost of freight." Further difficulties are caused by the divergent 
methods of classifying articles of import and export which are 
adopted by different countries. See a paper on the Comparability 



856 THE RELIABILITY OF STATISTICS. [CHAP. X. 

view to international comparisons, statisticians are exerting 
all the influence they can command in the direction of 
bringing about uniformity in methods of collecting statistics 
in different places. 

Where complete accuracy is unattainable, it is im- 
portant to be able to calculate the limits of the possible 
inaccuracy. If we know the exact conditions under which 
the data were collected, and the precautions taken to ensure 
correctness, then to calculate such limits may be within 
our power, and due allowance for error can be made. It 
may be added that if, when statistics are being collected, 
the use that is to be made of them is known and borne in 
mind, then — although it may be necessary to make some 
allowance for the possible eflects of bias — they are more 
likely to be valuable for their purpose. 

§ 2. The interpretation of simple statistics.— A^a,v\j from 
any inaccuracy in the actual figures, there is a constant 
danger of reading into statistics what— when properly 
interpreted and analysed — they cannot be shewn to imply. 
For in the phenomena to which they relate there may be 
differences, of which the mere figures taken by themselves 
yield no indication. A few simple illustrations may be 
given of the kinds of error likely to result, if heterogeneous 
and incommensurable quantities are treated as though they 
were homogeneous and commensurable. 

In the comparison of price-lists, and in many other 

enquiries, constant guard must be kept against overlooking 

differences in quality. This applies even to raw materials. 

The quality of corn, for example, as well as the yield of the 

of Trade Statistics of Various Countries by Mr A. E. Bateman in the 
Statistical Journal for June 189L 



NOTE.] THE INTERPRETATION OF STATISTICS. ' 357 

harvest, varies with the season ; so that the Gazette average 
of wheat may itself be misleading. The fact of variation 
in the quality of raw materials is clearly recognised by 
Professor Rogers in his History of Agriculture and Prices. 
He purposely omits all notice of infeinor grain, and in 
calculating the average price of cattle neglects such quota- 
tions as evidently relate to animals much below the average 
quality. Similar omissions are made in the case of wool ; 
and it is pointed out that in this case the difficulty is 
increased by the fact that even among the various kinds 
of best wool, there is so large a difference in value as to 
suggest a difference of breeds in different districts. It is 
clear that under such conditions as these, the most careful 
judgment in the selection and manipulation of figures is 
essential. The task of comparing prices, simple as it may 
at first sight appear, is found to be one that needs for its 
adequate performance, not only freedom from bias, but also 
wide experience, and sagacity of a high oi"der\ 

1 "As regards agricultural production, the initial difficulty of all 
the statistics is the different value of the units which go by the same 
name. The wheat, oats, and barley of one country, though called by 
the same names, are not the same as the wheat, oats, and barley of 
another country. There are the very greatest differences in quality, 
as any price list of London or other market, where grain from every 
part of the world is sold, would shew. Yet nothing is so common as 
comparisons of the world's production of wheat, for instance, in 
which this difference of quality is ignored, and fine reasonings are 
indulged in where this difference of quality might seriously affect the 
result. What is true of grain is as true, if not more true, of live 
stock. There are sheep and sheep, cattle and cattle, horses and 
horses; in truth the agricultural live stock of any two countries, 
instead of being susceptible of ready comparison, can hardly be 
compared directly at all. The point is notoriously of great importance 
in historical investigations. In comparing England of the present 



358 THE INTERPRETATION OF STATISTICS. [CHAP X. 

When we pass from raw materials to manufactured 
goods, the difficulty is enormously increased. There is 
room for wide divergence in quality, when only one kind 
of material enters into the composition of tlie couunodity 
in question ; and when materials are mixed, the proportion 
of the more valuable to the less valuable may in some cases 
vary almost indefinitely. The same names may even in 
course of time come to denote things that are practically 
different in kind. 

One or two instances may help to illustrate the point 
under discussion. It might have been anticipated that 
during the extraordinary inflation in the price of tin in the 
early part of 1888, the exports of tin-plates would decrease. 
As a matter of fact, however, they shewed a slight increase; 
and the explanation of the apparent anomaly seems to be 
that a large proportion of the goods classed as tin-plates in 
the Board of Ti'ade returns have little or no tin in their 
composition. During the period when the price of tin was 
so high, the shipment of these thin iron plates largely 
predominated over those more thickly coated with tin'. 

Another example is afforded by an instance in which 

day with the England of previous centuries the difference of the 
average weight and qualities of the live stoclc called by the same 
names has always to be considered. In nothing in recent years, as 
I understand, have some continental countries such as France made 
more remarkable improvement than in the quality of their live stock, 
so that with no increase in numbers, or httle increase, there has 
been an enormous advance in real production. The point is of equal 
importance in international comparisons" (Giffen on International 
Statistical Conqiarisons in the Economic Journal for June 1892, 
p. 225). Many other valuable illustrations of points mentioned in 
the text will be found in this article. 

1 See the Economist, 30 June 1888, p. 823. 



NOTE.] THE INTERPRETATION OF STATISTICS. 359 

the value given for a consignment of shirtings to New 
Zealand was challenged as being so low as to be obviously 
incorrect. Invoices were accordingly produced, and they 
proved both that the figures were rightly quoted, and that 
the goods were really described as shirtings. Further 
enquiry, however, brought out the fact that their object 
was to serve as slJrouds for the carcases of sheep sent to 
Europe in I'efrigerating chambers. It need hardly be added 
that for this purpose an article much inferior in quality and 
price to those ordinarily classed as shirtings was required ^ 

In some cases the diflferences in quality are now in one 
direction, now in the other, so that over any fairly large 
area they practically cancel one another. Error may then 
be avoided by simply taking averages. But no such re- 
source is available where the changes tend to be all in one 
direction, as in the improvement in the quality of some 
manufactured goods, and in house accommodation. In 
certain cases, as already indicated, there is a progressive 
change of quality even in raw materials. "An ox or a 
sheep," Professor Marshall remarks, " weighs now more 
than twice as • much as it used to ; of that weight a larger 
percentage is meat, of the meat a larger percentage is 
prime meat, and of all the meat a larger percentage is solid 
food, and a smaller percentage is water. "^ 

An instance of a somewhat different kind may be 
added, in which mere price-lists are likely to mislead those 
who have not special knowledge of the trades in which 
the lists are used. Where the price of the raw material is 
subject to considerable fluctuations, it is not unusual for 

1 Britisli Association Report for 1885, p. 870. 

2 Contemporary Revieio, March 1887, p. 375. 



360 THE INTERPKETATION OF STATISTICS. [CHAP. X. 

the nominal wholesale price of finished goods to remain 
unchanged — that is to say, there is no alteration in the 
published price-lists — while there is, nevertheless, an actual 
alteration in prices through a modification of discounts and 
in other ways. For reasons of this kind, price-lists may 
sometimes be even worse than useless, unless supplemented 
by additional information. 

Another obvious case in which care is necessary in 
the interpretation of statistics need be touched upon only 
briefly. Whenever there are changes in the prices of com- 
modities, it is clear that values, say of exports or imports, 
afford no adequate measure of amounts. For instance, 
in 1872 we exported iron and steel to the value of 
£35,996,167, and cotton yarn to the value of £16,697,426; 
while in 1882 the figures had fallen to £31,598,306, and 
£12,864,711. The amounts were, however, only 3,382,762 
tons and 212,327,972 lbs. in the former year; while tliey 
were 4,353,552 tons and 238,254,700 lbs. in the latter. 
Here then is a further reason why all statistics involving 
prices need to be interpreted with caution. It is now 
generally recognised that between distant periods any bare 
comparison of prices is worthless ; we are practically more 
in danger of being led astray in the comparison of statistics 
over a long series of consecutive years. 

Passing to statistics of wages, it is to be observed that 
the figures themselves usually give nothing more than 
nominal time wages, and hence afford a very uncertain 
criterion both of real wages and of task wages. Other 
variables are involved in the determination of both of 
these, and supplementary statistics are therefore required 
if a comparison is to be made either of the well-being of 



NOTE.] THE INTERPRETATION OF STATISTICS. 361 

the working classes, or of the cost of labour, at different 
periods or in different localities. Account must, for in- 
stance, be taken, not only of variations in the prices of those 
commodities upon which wages are habitually spent, but 
also of variations in their quality, thus again introducing 
the difficulties to which reference has already been made. 
We need not dwell upon the importance of also taking 
into consideration variations in hours of labour, intensity of 
labour, continuity of employment, and so on. The necessity 
of having regard to such points as these shews, however, 
the difficulty attending arguments from wage-statistics to 
the condition and progress of the working classes. Any 
argument bearing upon this problem should if possible be 
cumulative, the same result being obtained from different 
points of view and from quite independent figures. 

In other questions relating to wages it may be necessary 
to take account of the quality of the work done ; and the 
neglect of this consideration may equally vitiate an argu- 
ment from statistics. Professor Cliffe Leslie, in seeking to 
controvert the doctrine that wages tend to an equality, 
remarks that " Dorsetshire, Somersetshire, and Devonshire 
labourers have for the last fifty years been earning less 
than half what the same men might have earned in 
Northumberland." Granting, however, that, during the 
period referred to, agricultural wages in ISTorthumberland 
were twice those of the south-western counties, it does 
not follow that the same men, who earned ten shillings 
a week in Devonshire, would have been able to earn 
twenty sliillings if they had migrated to the north ; for 
the very fact that the northern labourers had for two 
or three venerations been earning higher wages would be 



362 THE INTERPRETATION OF STATISTICS. [CIIAP. X. 

likely to make them more efficient workers and more 
valuable to their employers. 

A further difficulty arises from, the fact that in the 
course of time the character of the work itself may change ; 
so that men who are called by the same name are not 
necessarily doing the same work. For instance, the rates 
of pay of postmen in India have increased considerably 
in recent years. The work required of them is, however, 
found to be of a ditferent character, involving greater 
responsibility, and demanding a better education and a 
higher degree of intelligence. In 1855 they had only to 
deliver letters, and many of them could not even read their 
own vernacular. Now they have to pay money orders, and 
some of them are expected to read English as well as the 
vernacular language of the district'. 

From what has been said in this and the preceding 
section it follows that if a collection of statistics is to be 
of scientific value, it should not be a mere list of figures. 
The method of collection and the principle of compilation 
should be carefully explained; and, if possible, notes should 
be added touching on any peculiar influences that have 
affected the phenomena themselves, or the accuracy of the 
returns, during the period over which the statistics extend. 
There should in particular be evidence that any apparent 
anomalies have been made the subject of special investi- 
gation, so as to exclude the possibility of their being 
simply due to error of some kind. The more experienced 
the statistician, the more scepticism he shews about all 
statistics which have not been compiled in accordance with 
the above conditions. 

1 See Barbour, Theory of Bimetallism, p. 125. 



NOTE.] THE RANGE OF STATISTICS. 363 

§ 3. The range of statistics. — Another danger to be 
guarded against in the use of statistics is that of basing 
conclusions upon an incomplete survey. It need hardly be 
said that if we are seeking empirically to determine the 
effects of any cause, either our facts and figures should be 
gathered from the whole area or period over which the 
operation of that cause is felt, or we should at least have 
adequate grounds for believing that those statistics to 
which we confine our attention are typical and repre- 
sentative. A similar precaution is necessary when by the 
aid of statistics we investigate the course or progress of 
economic phenomena. 

From this point of view it is necessary again to refer 
to the importance of considering the manner in which 
statistics are collected. The individual statistics may be 
perfectly correct, but they may be unrepresentative. It is, 
for instance, unsatisfactory to obtain statistics of wages by 
means of circular letters forwarded to workmen with the 
request that they will fill in various details. Only a few 
send answers, and these are likely to be the better off and 
the more intelligent. There is, therefore, no guarantee that 
the statistics so obtained are really typical. 

Another point to notice in connexion with wage-statistics 
is that in comparing wages in different occupations and at 
different times, average yearly earnings constitute the only 
satisfactory unit. The regularity of employment varies 
enormously in different trades and at different periods; 
and a mere record of the daily or weekly wages earned 
by those who succeed in getting work may, therefore, be 
misleading, in so far as it gives no indication of the extent 
to which workmen are liable to be temporarily unemployed. 



364 THE RANGE OF STATISTICS. [CHAP. X. 

Professor Thorold Rogers's view that the fifteenth century 
and the first quarter of the sixteenth may be regarded as 
" the golden age of the English labourer " has from this 
standpoint been criticized by Dr Cunningham and others, 
on the ground that it rests not only upon the interpretation 
of prices, but also upon the assumption that the labourer's 
income is fairly represented by three hundred times his 
daily wages. 

Turning to a different department of economic enquiry, 
it is unsatisfactory, in seeking to investigate the effects 
of gold discoveries on prices, to attend only to statistics of 
prices in a few principal markets. Cliffe Leslie adduces 
evidence to shew that the gold discoveries of 1850 coincided 
with the opening up of backward places through improve- 
ments in means of communication. This tended to bring 
about — what there had not previously been — a level of 
prices between the hitherto backward places and the great 
centres of commerce and industry ; and the new gold 
enabled the process to be carried out by a levelling-up 
instead of a levelling-down, i.e., it was made possible for 
prices to be raised in the former localities without their 
being at the same time lowered in the latter. It was, 
accordingly, in backward places — for example, on the new 
lines of railway in the inland parts of Ireland and Scotland, 
and similarly in many countries of Europe — that the effect 
of the gold discoveries in raising prices was most apparent ; 
it could not be properly estimated by merely considering 
prices in great towns such as London and Paris'. 

Considerations of a somewhat similar kind are pertinent 

' Es.^ays in Political and Moral I'liilosophij , 18S8, pp. 282, ff. 



NOTE.] THE GROUPING OF STATISTICS. 365 

in relation to the effects of diminished gold supplies. Pro- 
fessor Nicholson holds that a falling off in the supplies 
of gold is likely to exert its primary influence in countries 
on the margin of the commercial world, in which credit is 
comparatively little developed ; and that we cannot, there- 
fore, properly investigate the operation of the diminished 
production of bullion by simply attending to statistics of 
gold reserves, and movements of the precious metals, in 
the great centres of commerce. 

§ 4. The groujnng of statistics. — While our statistics 
must not be partial, we must also seek to fulfil the more 
difficult requii^ement of so grouping or "weighting" them, 
as to bring out correctly their relative importance. In 
studying the course of prices, for instance, while careful 
not to overlook any markets occupying a unique position 
or affected by peculiar influences, we must also be careful 
not to assign the same relative weight to small as to large 
markets. 

A simple example will serve to indicate what is here 
meant. Suppose that on two successive days the price of 
corn in any market is thirty-two shillings and thirty-six 
shillings a quarter ; then a bare consideration of these 
figures gives thirty-four shillings as the average price for 
the two days. But suppose further that three times as 
much corn is bought and sold on the first day as on the 
second, then for most purposes it would be more correct to 
say that the average is thirty-three shillings. Speaking 
more generally, if amounts a, h, c are on different occasions 
sold at prices x, y, z respectively, we weight our price re- 

turns accordingly, and take as our average not '^ , 



866 THE GROUPING OF STATISTICS. [CHAP, X. 

but — "'. Where data for the deterniination of 

a + + c 

a, b, c are not available, it is usually impossible to ensure 
that our averages are not sometimes unduly enhanced, and 
sometimes unduly depressed, by reason of an exaggerated 
importance being assigned to small transactions of an 
exceptional chai-acter. In such a problem as that of 
measuring changes in the general purchasing power of 
money, the task of assigning varying weights to our 
primary figures becomes at the same time of increasing 
importance and increasing difficulty'. 

In taking the average of a series of averages there is 
a special risk of error, somewhat analogous to that just 
discussed. Thus, if there is a relative increase in the 
number of workers in more highly paid occupations, the 
average wages of all labour may rise much faster than 
the average of representative wages in each trade, or may 
even rise while the latter is stationary or falling. To quote 
an illustration given by Professor Marshall, — " If there are 
500 men in grade A earning I2s. a week, 400 in grade B 
earning 25s., and 100 in grade C earning 40s., the average 
wages of the 1000 men are 20s. If after a time 300 from 
grade A have passed on to grade B, and 300 from grade B 
to grade C, the wages in each grade remaining stationary, 
then the average wages of the whole thousand men will be 
28s. 6d. And even if the rate of wages in each grade had 
meanwhile fallen 10 per cent., the average wages of all 



1 The need for a "weighted index-number" is, however, dimin- 
ished, if the number of commodities taken as the basis of the 
calculation is made very large indeed. 



NOTE.] THE GROUPING OF STATISTICS. 367 

would still be al^out 25s. 6d, that is, would have risen 
more than 25 per cent."' 

The taking of averages is thus frequently complicated 
by the fact that an equal significance ought not to be 
attached to all the figures ; and the difliculty of the problem 
is still further increased when some kind of average less 
easy of calculation than the arithmetical is appropriate. 
In the great majority of economic investigations the arith- 
metical average is, indeed, the most suitable as well as the 
simplest ; but thei'e are some exceptions. For instance, if 
population doubles itself in twenty-five years, it is obviously 



1 Principles of Economics, vol. i., 3rcl edition, p. 772 note. Similarly 
Sir Eobert Giffen, in the article referred to in the note on p. 358, points 
out that "it is quite conceivable that in one of two countries the 
earnings may be higher than in the other in every single employment 
which can be enumerated and compared, and yet the average earnings 
of the average wage-earning man may be higher in the latter country 
than in the former, the reason being the different distribution of the 
people according to earnings. " The correctness of the above statement 
is shewn by a theoretical comparison as follows. Take first a com- 
munity of 1000 wage-earners distributed amongst employments A, B, 
C, D, E, the annual wages in these employments being respectively 
£50, £60, £70, £80, £90, and the numbers of men employed in them 
being respectively 500, 200, 100, 100, 100. Then take another 
community also of 1000 wage-earners in which the corresponding 
wages are £40, £50, £60, £70, £80 and the numbers employed 100, 
100, 100, 200, 500. The average wages per head will be found to be 
in the first case £61, and in the second case £69. "In a comparison 
of rates of wages merely according to the nature of the employment, 
the wages in the first community would obviously appear higher than 
in the second, and this would be strictly true in a sense; but the 
inference would be untrue that the average earnings of the wage- 
earning classes in the first community, striking a true average, would 
be higher." 



868 THE GROUPING OF STATISTICS. [CHAP. X. 

incorrect to say that the average annual increase is four 
per cent'. 

There are some cases in which to take an average at all 
may be misleading. If, for instance, we take an average 
of men's wages and children's wages, or of the earnings of 
professional men and manual labourers, or of house-rents 
in Whitechapel and in the neighbourhood of Hyde Park, 
we are averaging things that belong to different categories, 
neither of which is really represented in the result. Even 
if such an average can be of sei'vice for any special purpose, 
it will become delusive when used in ignorance of the 
diverse nature of the data on which it is based'. 

If there is continuity in our data, so that — although the 
extremes are far removed from one another — we pass be- 
tween them gradually and through all intermediate grades, 
then it is a different matter. But in any case the value of 
an average is enormously increased if at the same time the 
range of the variations on both sides is clearly stated. The 
truth is that an average from its very nature lets drop a 
considerable amount of information. In itself it tells 
nothing as to the manner in which the data from which it 

^ On the different kinds of averages, and on the subject of averages 
in general, see Venn, Logic of Chance, 1888, Chapters 18, 19; also 
Bowley, Elements of Statutlcs, pp. 107, ff. 

2 It has been said, e.g., by Mr Longe, that there is no such thing 
as an average or general rate of wages. In one sense this admits of 
easy disproof, since we can take the arithmetical mean of any series 
of quantities whatever. What is meant, however, is that wages in 
different occupations are unrelated to one another and disparate, so 
that their average is a mere number and has no practical signification 
or importance. This view, although it may be rejected, will serve to 
illustrate the meaning of what is said above in the text. 



NOTE.] THE GROUPING OF STATISTICS. 369 

is obtained are grouped. It may, therefore, advantageously 
be accompanied by a supplementary statement on this point, 
giving not only the extreme deviations from the average as 
above suggested, but also the average deviation". 

This leads to the remark that in treating of fluctuations 
from an average, considerable importance attaches to the 
particular range over which the average has been calcu- 
lated. In dealing, for instance, vi^ith the statistics of some 
phenomenon over a term of years, we may seek to establish 
a periodicity in the movements towards and away from the 
average ; but the average, if taken for successive pei'iods of 
years, may itself be subject to progressive variations, and 
unless these are correctly calculated and due allowance 
made for them, our conclusions may be seriously vitiated. 
Thus what has been called the " par " of trade, that is, the 
level which indicates neither prosperity nor depression, is 
itself ever gradually shifting its position. The exports and 
imports of any given year, the railway traffic receipts, the 
production of iron and the like, must not be compared 
simply with the corresponding statistics of some former 
period ; for they may all shew an increase, and yet — because 
the normal level has itself risen in the interval — the later 
date may coincide with the lowest tide of depression, whilst 
the earlier coincided with the highest tide of prosperity'. 
On the other hand, if we are studying the secular move- 
ments, it is equally necessary to have analysed the periodic 
variations. Averages of terms of years have to be com- 

1 Compare Venn, Lorjic of Chance, pp. 444, ff. 

" If we merely compare a single year at one period with a single 
year at anotlier, we are practically committing the fallacy referred to 
in the preceding section, namely, of arguing from partial data. 

K. 24 



370 THE GROUPING OF STATISTICS. [CHAP. X. 

pared, and the periods over which these averages are 
taken should be such as to eliminate as far as possible 
interferences caused by the periodic movements'. 

It is not intended to give here a systematic discussion 
of the technique of the statistical method ; and enough has 
now been said to indicate the nature of the difficulties to 
which the treatment of statistics may give rise. The 
theory of statistics, which investigates in detail both the 
principles in accordance with which statistics should in the 
first instance be collected and arranged, and also the right 
methods of taking averages and dealing with fluctuations, 
is, as we have already pointed out, a department of applied 
logic or methodology. As such, it demands a distinctive 
treatment, though it seems hardly appropriate to speak of 
it as an independent science. 

^ Compare Jevons, Investigations in Currencn and Finance, 
pp. 34, ff. 



INDEX. 



Absolutism of theory, 298. 

Abstract economics, 142 — 5 ; 299, 
300; 310—14. 

Abstraction, method of, 119 — 28; 
218,9; 224,5. 

Acbenwall, G., 329. 

Adams, H. C, 45 n. 

Agreement, method of, 202. 

Algebraic methods, 254 n. 

Altruistic motives, 44; 124 — 7. 

Ambiguity of terms, 160 — 3. 

Analysis of conceptions, 156. 

A posteriori arguments for free 
trade or protection, 192 — 4 ; 
196—8. 

Applied economics, 58; 93; 143n. 

Arithmetical average, 367. 

Arithmetical examples, 254—6. 

Art, 35; 39 n. 

Art of political economy, 36 ; 55 
—60; 74—83. 

Ashley, W. J., on the German 
Historical School, 22 n.; on 
economic theorists and econo- 
mic historians, 29 n. ; on the 
price of iron in the fourteenth 
century, 303 ; on economic 
legislation, 306 n. ; on the his- 
torical conception of political 
economy, 321, 2. 

Assize of Bread and Ale, 306. 



'Austrian School,' the, 21; 266. 
Average value and normal value, 

225 n. 
Averages, 349; 365—70. 
Axiomata media, 178. 

Bacon, Francis, on science and 
its practical applications, 48«.; 
on the explication of concep- 
tions, 153; on experiments, 
183 11. 

Baden-Powell, Sir G., 194 n. 

Bagehot, W., on the scope and 
method of political economy, 
12 sqq.; on the abstract cha- 
racter of political economy, 117 
n. ; on the a posteriori method, 
209 ; on the functions of obser- 
vation, 231; on the assumptions 
of economic science, 242, 243 n. 
on the method of science, 246 
on the Bank of England, 270 
on the relativity of economic 
doctrines, 299 ; his limitation 
of political economy to the 
theory of modern commerce, 
306 — 10; his use of statistics, 
346. 

Bank of England, 269, 70. 

Banking, art of, 75. 

Barbour, D., 362 m. 

24 2 



372 



INDEX. 



Bateman, A. E., 356 /(. 
Biological analogies in political 

economy, 149. 
Black Death, 190; 273—6. 
Blauqui, J. A., 291 n. 
Bonar, J., on Malthus, 192 «.; on 

Eicardo, 239 7i. 
Bowley, A. L., 310 n., 354 n., 

368 n. 
Biamwell, Lord, 32 n. 

Cairues, J. E., on the scope and 
method of political economy, 
12 sqq.; on applied political 
economy, 59)).; onlaisnerfalrc, 
72)1.; on rent, 89; on second- 
ary influences in economics, 
118/i.; on 'mental experiment,' 
182 n. ; on a posteriori evidence, 
195; on slave labour, 206; on 
the inductive method, 209 ; on 
the hypothetical character of 
political economy, 226 )). ; on 
the ultimate premisses of eco- 
nomic science, 230 n., 243 m.; 
on mathematical methods, 256 ; 
on the effects of the Australian 
gold discoveries, 271 «•; on po- 
litical economy and statistics, 
342. 

Capital, 156 ; 157 n. ; 167 ; 169, 70 ; 
functions of, 69; 87; increase 
of, 134; 205,6. 

Carlyle, Thomas, 71 n. 

Cartograms, 340 u. 

Causation, laws of, 217 sqq. 

Causes in history, 287. 

Caveat emptor, rule of, 131. 

Census Keport, 353 n. 

Ceteris paribus, 218. 



Ceylon, 284 «.; 308. 

Chamberlain, J., 130 n. 

Chances, doctrine of, 339. 

Cherbuliez, A. E., on the con- 
sumption of wealth, 110 ?«. ; 
on scientific division of labour, 
136. 

Clark, J. B., on the definition of 
wealth, 98 ; on distribution and 
exchange, 104 jj. 

Classification, 158; 164; 175—8. 

Cohn, G., on the German His- 
torical School, 22 n. ; on in- 
duction and deduction, 28 n. 

Colloquial use of terms, 160 — 2. 

Commercial aims, 120. 

Common sense, 149 — 52. 

Communism, experiments in, 
185—7. 

Comparative method, 284 n. 

Competition , 31 ; 38, 9 ; 42, 3 ; 86 ; 
302—4; in the Middle Ages, 
273; 276; 302,3. 

Competition, hypothesis of, 67; 
240,1; 245 ?i.; 294,5. 

Competitive prices and customary 
prices, 300 n. 

Comte, A., on political economy 
and sociology, 112 sqq.; his 
use of the terms 'statics' and 
'dynamics,' 146; on definitions 
in political economy, 154. 

Concomitant variations, method 
of, 202; 339. 

Concrete economics, 143 — 5 ; 
300, 1. 

Conring, H., 329 7i. 

Consols, price of, 212. 

Constructive economics, 174 ; 
204 )i. 



INDEX. 



^73 



Consumption of wealth, 105 — 11. 

Continuity of economic pheno- 
mena, 171; 262. 

Conventional morality, rules of, 
131. 

Co-operative production, 207. 

Corn Laws, effects of their repeal, 
200; 235,6. 

Cosmopolitanism of theory, 298 
n. 

Cosmopolitical economy, 76—8. 

Cossa, L., on applied political eco- 
nomy, 59 n. ; on the premisses 
of economic science, 244 n. 

Cost of production, 62,3; 69; 
104,5; 143,4; 164 n.; 226 71.; 
263. 

Counteracting causes, 217 — 21. 

Cournot, A., on unproductive 
consumption, 107 n. ; his use 
of the hypothesis of pure mo- 
nopoly, 241 n. ; his use of 
algebraic methods, 254 ?i. ; on 
the application of mathematics 
to political economy, 257 — 9; 
265. 

Cunningham, W., on economic 
science, 53 n. ; on the ethics 
of political economy, 61 n. ; on 
changes in the use of terms, 
168 n. ; on political economy as 
an empirical science, 176 n. ; 
on the importance of economic 
literature to the historian of 
economic facts, 290 n. ; on 
medieval prices and rents, 302 ; 
on Thorold Sogers, 364. 

Cvirves, method of, 340, 1. 

Custom, 272,3; 276; 300. 

Customary prices, 300n.; 302 — 4. 



Deduction and induction, 27,8; 

172; 194,5; 205; 208. 
Deductive method, 216 — 51. 
Definition, 153—71. 
Dependent and independent 

changes, distinction between, 

219. 
Do Quincey, T., on Eicardo, 

297. 
Descriptive economics, 174 — 8 ; 

204 n. 
Descriptive school of statisticians, 

329; 330 n. 
Desire of wealth, 119—28. 
Devas, C. S., on economics and 

ethics, 54 n. 
Dewey, D. E., 340 «. 
Diagrammatic methods, 254 n. ; 

260—7. 
Diagrams, statistical, 339 — 41. 
Difference, method of, 179 — 81; 

184; 185; 188—201. 
Diminishing Eeturn, law of, 85; 

181; 240. 
Diminishing Utility, law of, 240 ; 

311. 
Distribution of wealth, 42 n. ; 81, 

2; 102—5; 209—12; 269. 
Disturbing causes, 222,3; 230,1. 
Dogmatism in definition, 163. 
Dunbar, C. F., on the academic 

study of political economy, 

49 n. ; on observation and the 

deductive method in econo- 
mics, 230 n. 
Dynamics of political economy, 

146—9. 

Economic activities, subject to 
moral laws, 41. 



374 



INDEX. 



Economic activity, definition of, 
99, 100. 

Economic development, 45 ; 140, 
1; 145—7; 269,70; 283—5; 
321,2. 

Economic history, 268 sqq.; philo- 
sophy of, 283; 321—3. 

Economic ideals, 32, 3; 36; 44,5; 
55; 62,3; 78—83. 

Economic laws, 3 ; 36 ; 86; 89, 90. 

Economic legislation, 32 n. 

'Economic man,' the, 16; 19; 
24; 115—28; 143; 218. 

Economic motives, 119; 129 — 
34. 

Economic politics, 53 ji., 78 ?j. 

Economic precepts, 32,3; 36. 

Economic theories, history of, 
289—96. 

Economics, 2; 53?!.; 92??. 

Economy, 1; 100. 

Edgeworth, F. Y., on mathema- 
tical reasoning, 258?i.; on the 
treatment of variables, 262 ; on 
the application of mathematics 
to political economy, 264 n., 
265 H., 266 ?i. 

Egoism and altruism, 119 — 28. 

Eight hours' day, 185 ; 187 ii. 

Ely, K. T., on the ideal of political 
economy, 82. 

Empirical generalizations, 202 — 
15; 344, 5. 

'English School,' the, 20, 1; 29. 

Ethical conception of political 
economy, 23; 25,6; 37,8; 46— 
54; 60—3. 

Ethics, 35 n. 

Ethics of political economy, 36; 
60—3. 



Exchange of wealth, 69,70 ; 96 «.; 

103—5; 209—12. 
Exclusiveness, fallacy of, 8, 9. 
Experiment, 178—87. 
Experimenta lucifera et friicti- 

fera, 183 n. 
Experimental legislation in the 

Middle Ages, 184 7i. 
Export and import statistics, 

352; 355; 360. 
Export duties, 77. 
Extension of demand, 264, 5. 

Fallacies in political economy, 

7,8 
Farrer, Lord, 194 ?i.; 347?;. 
Financial crises, 134. 
Fluctuations from an average, 369. 
Flux, A. W., on graphic statistics, 

340 n. 
Formal economics, 174. 
Foxwell, H. S., on the use of 

mathematical analysis, 261. 
Free trade and protection, 76 w.; 

136,7; 192—4; 196—201; 346, 

7. 

'German Historical School,' the, 
20 sqq. ; 82 ; 124 n. ; 314 sqq. 

Giffen, Sir R., on the method of 
difference in economic reason- 
ings, 197, 8 ; on the use of the 
deductive method, 214 n. ; on 
Malthus, 345 ; on the use of 
statistics, 347?(., 348 ?i., 351??.; 
on statistical comparisons, 
358 n., 367 n. 

Gold discoveries, 200; 271; 364, 

Gold supply and prices, 214 ; 220, 
1; 364,5. 



INDEX. 



375 



Graphic method of statistics, 339 

—41. 
Gresham's law, 36 ?j. ; 307. 
Guy, W. A., 336 n. 

Harrison, F., on political economy 

and sociology, 113 Ji. ; on the 
, operation of religious motives, 

138 n. ; on the postulates of 

political economy, 243 n. 
Hedonics, 91 n. 

Hildebrand, B., 20; 22?^.; 321 Ji. 
Historical conception of political 

economy, 314 — 27. 
Historical illustrations, 271 — 7. 
Historical method, 24, 5 ; 147 ; 

270; 279—85; 314—27. 
Historical method of definition, 

168 n. 
'Historical School,' the, 20 sqq.; 

147; 278; BUsqq. 
'Historismus,' 316; 324 7t. 
History and statistics, 203. 
Hooper, W., on statistics, 332 n., 

336, 7. 
' Hypothetical,' application of the 

term to deductive political 

economy, 217 — 26. 
Hypothetical precepts, 57 ; 79, 80. 

Illustrative hypotheses, 228. 

Incidence of taxes on commo- 
dities, 234,5. 

Inconvertible currency, 134. 

India, 77; 284 n.; 300 ?t.; 308,9; 
362. 

Indirect taxation, 170. 

Induction and deduction, 27, 8 ; 
172 ; 194, 5 ; 205 ; 208. 

' Inductive,' use of the term, 203 ??. 



Inductive method, its varieties, 
178. 

Industrial legislation, art of, 59 ; 
76 n. 

Ingram, J. K., on political econ- 
omy and sociology, 26,7, 113 ji.; 
on the use of mathematics 
in economic reasoning, 257 ; 
on the historical method, 315, 
321 n. 

Intensification of demand, 265. 

Interdependence of economic phe- 
nomena, 102 sqq. ; of physical 
phenomena, 137. 

Interest, payment of, 33 ; 292, 3. 

Intermixture of effects, 210. 

International values, 246, 7 ; 253 ; 
318 M. 

Introspection, 173. 

' Iron law ' of wages, 295, 6. 

Jenkin, Fleeming, on the law of 
supply and demand, 262 n. 

Jevons, W. S., on applied poli- 
tical economy, 59 n. ; his de- 
scription of economics, 91 n. ; 
his theory of consumption, 
105 71., 108 m., 110; his theory 
of commercial crises, 134 ; on 
abstract economics, 142 ; his 
'Theory of Political Economy,' 
143 ; on tentative legislation, 
184 n. ; on empirical know- 
ledge, 208 ; on the mathemati- 
cal character of political eco- 
nomy, 252 ; his use of algebraic 
methods, 254 n. ; his theory 
of utility, 265, 6 ; on observa- 
tion, 285 ; on the first principles 
of political economy, 312 7i. ; 



876 



INDEX. 



his 'Investigations in Currency 
and Finance,' 340 n. ; on the 
use of diagrams, 341 ; on fluc- 
tuations from an average, 370 n. 

Johnson, W. E., on the chief de- 
partments of economic science, 
175 11. ; on the postulates of 
political economy, 245 n. 

Jones, Eichard, his reaction a- 
gainst the doctrines of Ricardo, 
21 ; on definitions in political 
economy, 153, 4 ; on the rela- 
tivity of economic doctrines, 
2987!. ; on history, 326. 

' Just price,' 62, 3. 

Kingsley, Charles, 42 n. 

Knies, K., his doctrine of eco- 
nomic method, 20 sqq. ; on 
political economy as a social 
science, 92 ; on the postulate 
of self-interest, 123 sqq. ; on 
political economy and socio- 
logy, 138 H. ; on absoli;tism of 
theory, 298 ; on Eoscher, 317 ii. ; 
on the historical conception of 
political economy, 319 ; his 
view of statistics, 330 m. 

Laisser Faire, 25; 36?;.; 51; 

67—74; 135 «. 
Laveleye, E. de, his definition of 

political economy, 75 n. ; on 

the consumption of wealth, 

106??.., 108 ?i. 
Laws and precepts, confusion 

between, 36 n. ; 50, 1 ; 64, 5 ; 

70,1. 
Legislation, 182 — 4. 
Leroy-Beaulieu, P., on the con- 



sumption of wealth, 106?j., 
108 71. 

Leslie, T. E. Cliffe, on the method 
of economics, 21 ; on the theory 
of cost of production, 104 ; on 
unproductive consumption, 107 
n. ; on the desire for wealth, 
120?i. ; on the deductive method, 
213 ?l; on the deductive econ- 
omist's theory of taxation, 235 
n. ; on the application of ma- 
thematics to political economy, 
257 ; on medieval society in 
Germany, 301 ; on the deduc- 
tive and historical methods, 
315 ; his use of the deductive 
method, 318 ?i.; on the histori- 
cal method, 321 n. ; on agri- 
cultural wages, 361 ; on the 
effects of gold discoveries, 364. 

Lewis, Sir G. Cornewall, 39 n. ; 
59 n. ; 190 n. 

Lexis, W., on the consumption of 
wealth, 106 n., 107 /(. 

List, F., on political economy 
and cosmopolitical economy, 
76 ; on the commercial su- 
premacy of Great Britain, 200 ; 
his use of history, 286 ; on the 
relativity of economic doctrines, 
298 n. 

Logic, 35 n. 

Logic of political economy, 3 sqq. 

Longe, F. D., 368 h. 

McCuUoch, J. E., on govern- 
mental interference, 73, 4 ; on 
the consumption of wealth, 
100 ?t., 107??., 108 71. 

Machinery, exportation of, 77. 



INDEX. 



377 



Machinery and wages, 280—3. 

Maine, Sir H. S., on sciences 
founded on abstractions, 125 n. ; 
his method of investigation, 
284 n. ; on competitive prices 
in India, 300 n. ; on customary 
prices, 304 ; on the economic 
phenomena of the East, 308,9. 

Malthus, T. E., his relation to 
Adam Smitli, 11 ; Iris defence 
of the. corn laws, 73 ; on defini- 
tions in political economy, 161 ; 
his comparison between Norway 
and Sweden, 191,2, 195; his 
use of the inductive method, 
206 ; his influence on subse- 
quent legislation, 291 ; his rela- 
tion to contemporary pheno- 
mena, 294; his use of statistics, 
345. 

Marshall, A. , on the definition of 
wealth, 95 n. ; on J. S. Mill, 
116 n. ; on measurable motives, 
127 n. ; on the wages of women, 
132 11. ; on political economy 
and sociology, 139; on the 
use of the terms statics and 
dynamics in political economy, 
148, 9; on the condition of the 
working classes at the begin- 
ning of the century, 199 n. ; on 
the need of deductive reasoning, 
211 ; on the variation in eco- 
nomic forces over long periods, 
225 n. ; his ' Principles of Eco- 
nomics,' 230 ?i.; onAdam Smith, 
232 11. ; on the function of a 
pure theory, 240 n. ; on the 
use of numerical illustrations, 
256 n. ; his conti'ibutions to the 



theory of value, 263 ; on the 
mutual dependence of economic 
phenomena, 264 ; his use of 
mathematics in jDolitical eco- 
nomy, 266 71. ; on competition 
and custom, 276 h. ; on the 
historian's need of theory, 286 ; 
on the records of the economic 
past, 326 11. ; on the graphic 
method of statistics, 340 n. ; on 
changes in the quality of com- 
modities, 359 ; on averages, 
366,7. 
Mathematical character of polii 

tical economy, 252 sqq. 
Mathematical methods, 256 — 67. 
Mather and Piatt, Messrs, their 
experiment in the working of 
an eight hours' day, 185 ; 187 n. 
Mayo-Smith, R., on the motive 
of self-interest, 126 n. ; on the 
inductive method in economics, 
201 n. ; his use of the term 
' inductive, ' 203 9i. ; on statisti- 
cal science, 335, 6 ; on the use 
of statistics, 351 n. 
Mayr, G., on the science of sta- 
tistics, 333. 
Measurable motives, 127 ; 173. 
Medieval and modern prices, 272. 
Menger, C, on the discussion of 
method, 5 ; his doctrine of 
economic method, 21 n. ; on the 
German historical school and 
the dogma of self-interest, 124 
11. ; his relation to mathematical 
economics, 266 ; on ' historis- 
mus,' 324 w. 
Mercantile system, 293, 4. 
Method, 2, 3. 



378 



INDEX. 



Method of political economy, 30. 

Mill, James, on the consumption 
of wealth, 106 h., 107 h., 108 h., 
110. 

Mill, J. S., on the scope and 
method of political economy, 
11 sqq.; on the distribution of 
wealth, 42 n. ; on the rule of 
laisser faire, 74 ; on export 
duties, 77 ; on political econo- 
my as a psychological science, 
90; on capital, 103 n.; on the 
consumption of wealth, 110 n. ; 
on political economy as an 
abstract science, 116 sqq. ; on 
socialism, 132, 3 ; on the prob- 
lem of sociology, 141 ; on the 
' statics ' and ' dynamics ' of 
political economy, 146 ; on defi- 
nitions, 155 ; on the method 
of difference, 192, 198 n. ; on 
peasant proprietorship, 206, 7 ; 
on the method of simple obser- 
vation, 210, 11 ; on the deductive 
method, 216 ; on the verifica- 
tion of deductive reasoning, 
233 ; on international values, 
246, 7 ; his use of mathematical 
conceptions, 253 ; his use of 
numerical illustrations, 256 «.; 
on the applicability of mathe- 
matical principles, 256,7; his 
treatment of variables as con- 
stants, 263 ; on economic pro- 
gress, 284. 

Mobility of labour, 132 ; 310; 361. 

Money, definition of, 168 ; 170 ; 
value of, 16271. 

Monopoly, 68; 241. 

Montague, F. C, 326 «. 



Moral forces, operation of, 40 — 5. 

Moral science, 87. 

Mouat, F. J., on statistical science, 

330, 1. 
Mutual dependence of economic 

phenomena, 211; 264. 

Narrative economics, 174, 5. 

National economy, 100. 

National economy, art of, 78. 

Natural liberty, maxim of, 71. 

New South Wales and Victoria, 
193,4; 196—8. 

Nicholson, J. S., on Adam Smith, 
73 11. ; on the definition of 
wealth, 96 n. ; on the use of an 
historical method of definition, 
168 /(. ; his treatise on 'Money,' 
232?^. ; on general prices, 247 n., 
271 n. ; on the effects of ma- 
chinery on wages, 280, 281 n. • 
on the effects of diminished 
gold supplies, 365. 

Normal value, 224, 5. 

Normative science, 34, 5. 

Norway and Sweden, 191, 2 ; 195. 

Numerical premisses, 256 — 60. 

Observation, ITdsqq.; 227—36. 
Official statistics, 351,2; 355. 
Over-production, 107; 312. 
Owen, E., 185. 

Palgrave, R. H. I., Dictionary of 
Political Economy, 22 n. ; 174 h. ; 
245 n.; 340 «. 

Peasant Proprietorship, 18; 206,7. 

Permissive legislation, 184. 

Perpetualism of theory, 298 n. 

Personal wealth, 99. 



INDEX. 



379 



Petty, Sir W., 330 n. 

Phear, Sir J. B., 308 n. 

Philosophy of economic history, 
283; 321—3. 

Physical laws, 84 — 6. 

Physiocrats, 294. 

Pier son, Dr N. G., on the relation 
of economics to economic poli- 
tics and social politics, 78 n. 

Plurality of causes, 210. 

Political and social sciences, 92. 

Political economy, 2; 53; 100,1. 

Population, theory of, 109 ; 206. 

Positive science, 34, 5. 

Post hoc ergo propter hoc, 9>\ 199n.; 
286. 

Postmen in India, 362. 

Postulates of political economy, 
240—3. 

' Pre-economic ' periods, 307, 8. 

Premisses of deductive political 
economy, 240 — 3. 

Price, Bonamy, 150 n. 

Price, L. L., 231 n. ; on the mathe- 
matical and historical methods, 
261 n. 

Prices in the Middle Ages, 272, 3 ; 
302, 3. 

Production of wealth, 85, 6 ; 
102, 3 ; 133 ; 181 ; 205. 

Productive labour, 99. 

Protection in new countries, 

347, 8. 
Protective duty, 170. 
Psychology, 46; 87—91. 

Quantitative inductions, 339. 
Quetelet, A., 328; 330 n.; 339. 

Kae, J., 73 n.; 74 n. 



Eegulative science, 34. 

Kelativityof economic definitions, 
166 — 71 ; of economic precepts, 
64, 5 ; 305, 6 ; of economic 
theorems, 15 n. ; 24 ; 143 ; 
231; 278; 297 sg*/.; 319—21; 
327. 

Eesidues, method of, 181 n. 

^Revile de Belgique,' 316 n. 

Eicardian law of rent, 36 n.; 301, 
2; 312,3. 

Eicardo, D., 5 ; his influence on 
English political economy, 11 ; 
on governmental interference, 
73; his use of the deductive 
method, 236 — 40; his treatment 
of variables as constants, 263 ; 
relation of his assumptions to 
contemporary economic pheno- 
mena, 294 — 6. 

Eichmond, W. , 61 n. 

Eobinson Crusoe, 88. 

Eogers, J. E. Thorold, on defi- 
nitions in pohtical economy, 
154 n., 158; on medieval prices, 
273 11. ; on the Statute of La- 
bourers, 275 n.; on supply and 
demand in the Middle Ages, 
303; his 'History of Agri- 
culture and Prices,' 357; on 
the English labourer in the 
fifteenth century, 364. 

Eoscher, W., on the scope and 
method 'of political economy, 
20 sqq.\ on the consumption 
of wealth, 106 n., 107 n., 108 n.; 
on the limits of the method of 
abstraction, 128; his attitude 
of moderation, 316, 7. 
Eiimelin, G. von, 328 n. 



380 



INDEX. 



Sax, E., on the method of poli- 
tical economy, 22)).; on the 
ultra-historical view, 325. 

Say, J.-B., on the consumption 
of wealth, 106 n., 108 )). 

Scheel, H. von, on the inductive 
and deductive methods, 28 n. ; 
on the scope of political econo- 
my, 38; on political economy 
and sociology, 138 )(. 

Schmeitzel, M., 329)). 

SchmoUer, G., on the scope and 
method of political economy, 
26, 7 ; on the abstract method, 
315, 6 ; on the historical con- 
ception of political economy, 
321, 324. 

Schonberg, G., on the scope and 
method of economics, 22 ?(.; on 
the aim of political economy, 
82 ; on the nature of economic 
laws, 86 n. ; on the influence 
of legal conditions, 135 ?). ; on 
political economy and soci- 
ology, 137 )). 

Science, 35 7i. ; 39 )). ; 150. 

Science of jJolitical economy, 36 ; 
53. 

Scientific division of labour, 136; 
325. 

Scope of a science, 2. 

Self-interest, motive of, 119 sqq. 

Seligman, E. E. A., on the Ger- 
man historical school, 29 n. ; 
on medieval prices, 302, 3. 

Senior, N. W., on the scope and 
method of political economy, 
11 sqq.; on the consumption 
of wealth, 105 )).; on the non- 
hypothetical character of poli- 



tical economy, 224 n. ; on the 
premisses of political economy, 
243 n.; on the universal vali- 
ditj' of economic doctrines, 
297. 

Services, 96, 7. 

Sherbrooke, Lord, on general so- 
ciology, 139. 

Sidgwick, H., on the method of 
the older economists, 18; on 
' speculative ' science, 34 n. ; 
on science and art, 40 n. ; on 
the recognition of a distinct art 
of political economy, 56 )). ; on 
Adam Smith, 73 n. ; on the 
scope of political economy as 
an art, 81 ; on the inclusion of 
services under income, 97 n. ; 
on distribution and exchange, 
104)).; on the consumption of 
wealth, 109 )). ; on the desire 
for wealth, 122 )). ; on general 
sociology, 139 )). ; on the dis- 
cussion of definitions, 155; on 
the use of terms, 160; on the 
premisses of political economy, 
244?).; on the ambiguity of 
'increase of demand,' 264; on 
Cliffs Leslie and the historical 
school, 318 7). 

Sigwart, C, on the desire for 
wealth, 119 )). 

Slave labour, 18 ; 206. 

Smith, Adam, his method of rea- 
soning, 10, 11 ; his use of the 
term 'science,' 35 n.; his con- 
ception of political economy, 
40 )). ; his attitude towards 
laixfter faire, 72,3; his purjjose 
in the 'Wealth of Nations,' 



INDEX. 



381 



90; his sparing use of defini- 
tions, 159 ; liis use of history, 
232 n.; his influence ou sub- 
sequent legislation, 291 ; his 
relation to contemporary phe- 
nomena, 294. 

Social character of economics, 
87 sqq. 

Socialism, 52 ; 56; 69,70; 81,2; 
132, 3. 

Social politics, 78 ?i. 

Sociology and political economy, 
112—15; 135—41. 

Socratic induction, 161. 

Specific experience, method of, 
172; 178 sg^. 

Speculative science, 34 n. 

Standard of comfort, 222; 274; 
278. 

State finance, art of, 59 ; 76 n. ; 
81. 

Statics of political economy, 
145—8. 

Stationary state, 147; 225 n. 

'Statistical Journal,' 351 n. 

Statistics, derivation of the term, 
328 11.; science of, 328—38; 
theory of, 331,2, 370; method 
of, 338 — 41 ; in economics, 
342 — 50 ; precautions neces- 
sary in their use, 351 — 70. 

Statute of Labourers, 275, 6. 

Steuart, Sir James, 64. 

Stirling, Hutchison, 71. 

Strike of workmen, 249, 50. 

Substitution, law of, 312 n. 

Supply and demand, 41 ; 44 n. ; 
86,7; 253; 262; 303; 307; 
314. 

Sweden and Norway, 191,2; 195. 



Taxation, art of, 59; 81; prob- 
lems of, 33,4; 56; 109. 

Taxes on commodities, incidence 
of, 234, 5. 

Tentative legislation, 183, 4. 

Theoretical science, 34 n. 

Thornton, W. T., on the law of 
supply and demand, 262. 

Thiinen, J. H. von, 21; 128 «. 

Toynbee, A., on the historical 
method, 325, 6. 

Uniformities, ideals, and precepts, 

35; 40. 
Unproductiveconsumption, 107 n. 
Utilityi definition of, 94; theory 

of, 91 71.; 105; 110,1; 265,6; 

311. 
Utilization of wealth, 105 n. 

Validity of economic postulates, 
242, 3. 

Value, 162 n. 

Variables and constants, 262, 3. 

Venn, J., on illustrative hypo- 
theses, 228 n. ; on averages, 
368 n., 369 n. 

Verbal disputes, 155. 

Verification, 232—6. 

Victoria and New South Wales, 
193,4; 196—8. 

Wages of women, 132. 

Wages statistics, 352,3; 360—2; 
363,4; 366,7. 

Wagner, A., on the scope and 
method of economics, 22 n. ; 
on the inductive and deductive 
methods, 27, 8; on the problems 
of political economy, 37, 8, 



382 



INDEX. 



177 n. ; on the motive of self- 
interest, 126 n. ; on economic 
motives, 129 ».; on observation 
in political economy, 174«. ; on 
induction in political economy, 
227 n. ; on the postulates of po- 
litical economy, 241 n., 244 n. ; 
his relation to the German 
historical school, 316 n. ; on 
historical evidence, 326 n. 
Walker, F. A., on fallacious rea- 
sonings in political economy, 
7, 8 ; on the consumption of 
wealth, 105 n., 107 n., 108 n. ; 
on the wages of women, 132 n.; 
his treatise on the ' Wages Ques- 
tion,' 143. 



Walras, L., 106 h.; 108 m.; 
266 n. 

WappJius, J. E., on the deriva- 
tion of 'statistics,' 328 «.; on 
the nature of statistical science, 
330 71. 

Wealth, definition of, 93—9. 

Wealth in a communistic society, 
95. 

Weighted statistics, 365, 6. 

Whewell, W., on definitions, 
157 n. , 159, 160 ; on the method 
of curves, 340,1. 

Wicksteed, P. H., 266 n. 

Xenoi^hon, 292. 



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